Personal loans are versatile and there are best and worst ways people use them. A personal loan can be good if you use it properly like when you are in an emergency or when you are making bulk purchases. Personal loans can be great support when you need quick finance to provide towards any expense.
How does a personal loan work?
Personal loans are mostly unsecured loans; it means that there is no collateral associated with your loan. There are some personal loans where the loan is provided for security of car title or any other possession and most of the personal loans are unsecured.
In personal loans you will borrow a lump sum of money and then pay a fixed amount of interest and a portion of the principal amount. Over a period of time regular payments the loan amount will get reduced and certainly the loan will be paid off. Lenders use the credit check for finding out the eligibility of the loan of the borrower. By considering the monthly income, pay history and other loans the lender will offer a loan amount.
The loan approval takes just a few minutes and the lenders will provide funds as soon as possible generally the next business day.
Uses of Personal loan
A personal loan can be used for various purposes and some of the most common uses of personal loans are as follows.
- Consolidation of Debts
- Emergency
- Medical Expenses
- Purchases in large amount
- Property Renovations
1. Consolidation of Debts
When you have high interest on credit cards and other loans, you can choose the option of debt consolidation. Apply for a personal loan based on the various factors you will be able to get a personal loan. Use that money for paying off the smaller loans. Debt consolidation can help you to streamline your debts and payoff loans easily.
2. Emergency
When there is a breakdown of a car or if any of your appliances does not work this will be a huge expense. The burden of expenses can be reduced if you have taken a personal loan and get the emergency repairs done. If you have an emergency fund then you can use the amount but a personal loan is a good choice. Money will be disbursed quickly and it can be utilized if you prefer to use emergency funds for other emergencies, you can also use the personal loan if you do not have the emergency funds.
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3. Medical Expenses
Medical expenses may come up at any time and you have to overcome the challenge by getting treatment. Non-network medical expenses may be difficult to get done, but if you are in an emergency then you will need to get the dental work done. Personal loans can be used for the treatment. Generally insurance companies do not provide coverage towards cosmetic surgeries or Lasik treatments. Since these are not covered under the procedure you can use the personal loan amount to pay for the medical expenses.
Some hospitals are offering interest free payment methods so check for these options if they are available. Compared to a personal loan this option is very good to opt for.
4. Purchases in large amount
Big ticket purchases or any purchase that has a high amount in value can be a burden. If you have spent money on a big amount of purchases then for the whole month you have to suffer the pain of cash on hand. It becomes generally difficult to manage that month’s expense if a large portion of the amount goes towards big ticket purchases. In this situation a personal loan will come to your rescue. You can use your personal loan towards buying appliances, a marriage expense, repairing your car, going on a vacation, buying your dream car and any other goal. It should be noted that interest on personal loans is very high so spend money by assessing your purchases.
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5. Property Renovations
Another best use of personal loan is towards property renovations like improvements to your home. Your property is not required to be put under collateral to obtain the loan. Home renovation can be done with the help of a personal loan. Personal loans will have high rates of interest and home loans will have low rates of interest. Since this is home renovation a new home loan will not be issued. The best idea is to take a personal loan and then do the renovation of your home. You will get a personal loan much easily and funds will be disbursed quickly compared to a home loan.
Do not use personal loans
Personal loans should not be used for purposes mentioned below.
College fee– Do not use the personal loan for education purposes as you will not be able to repay the high rate of interest, instead take education loan and go for higher education the interest rates will be lower than personal loan.
Investment in business- Do not start business taking a personal loan as the interest rates will be high and repayment will be difficult as business profits are not guaranteed on time line. Instead go for a loan offered specifically for business. Government provides subsidies encouraging the business start ups.
Down payment- Do not use a personal loan for down payment on a car or home. Since these are depreciating assets the value will reduce over a period of time and repayment will be difficult. Instead choose a car loan or home loan for making the down payment.
Take away
Personal loans can be used in different ways and set for different purposes from emergency expenses to big ticket purchases. Personal loans can put a break on your monthly cash rotation as repayments may be difficult with high interest rates. Borrowers fall into the cycle of debt trap by misusing the personal loan funds. If you are using borrowed money carefully then personal loan can sail you through financial burden easily. Money management is an art and the one who manages personal loans well cannot fall into debt trap.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
