Understanding the Do's and Don'ts of Personal Loans
And Four Ways Not to Use Them!
Personal loans give you the financial freedom to finance just about anything, but before you take the next step and apply, it may be wise to take a closer look at your financial situation and the reason for using the funds.
Personal loans are a great tool for consolidating debt (such as high interest credit cards) or paying for an unexpected life emergency. But, knowing when and why to take out a Personal loan is the key.
What is a Personal Loan? A Personal loan is an unsecured advance of funds. This means there is no collateral to protect the loan. An example of a collateralized loan would be a mortgage – the home secures the loan. Should you default on your mortgage, the lender may foreclose on the home in attempt to recoup their loss.
A Personal loan can be a great option if you’re in a financial pinch. But, there are some situations when a Personal loan may not be the right choice.
1. Purchasing a Car: Like a mortgage, an auto loan is a secured debt that is guaranteed by collateral – which is the vehicle you’re purchasing. If for some reason you’re unable to repay the loan, the lender can reclaim the car and sell it to recover the money they lent you. Using an unsecured loan to finance a vehicle may not be the best option. Typically, rates for a Personal loan are higher than autos and there is a limit on how much you can borrow.
2. Financing a Vacation: Planning a vacation but short on cash? It may be best to hold-off and save up more. Using a Personal loan to fund a vacation may not be the best economical option if you want to bask in the sun with your toes in the sand. Personal loans accrue interest and unless you pay it off entirely before the term ends, you may end up paying more than what the actual vacation cost.
3. Home Repairs: Depending on the severity of the home repair a Personal loan may or may not be a good option. Using a Personal loan for large projects like remodeling a kitchen or bathroom may not be the best bang for your buck. Personal loans have maximum limits, meaning the dollar amount cannot exceed a certain amount. Depending on the size of the project, a Personal loan may not be enough to cover it. A good option to research would be a home equity loan. This type of loan uses the equity in your home as collateral and usually has a lower interest and may be tax deductible (speak with your tax preparer for details). For an immediate emergency repair such as a failing furnace or leaky roof, a Personal loan may be a good quick option.
4. Increasing Monthly Spending: Personal loans shouldn’t be used to increase your monthly expenses. If you find yourself falling behind on things like rent, car insurance, a cell phone payment or other monthly bills, try re-evaluating your spending habits and create a weekly or bi-weekly budget (depending on your pay schedule). Set some money aside from each paycheck for your bills and remember to stash a little in your savings (as a rainy day fund). Personal loans can be a good tool for unexpected emergencies but should not be used as a remedy for overspending.
Life happens and situations come up that leave us needing extra cash. There are times when it makes sense to use a Personal loan and times when you shouldn’t. The key to a clean bill of financial health is keeping your finances in order and under control. If you’re not sure whether a Personal loan is a good fit for your situation, feel free to give us a call at 1-888-436-1847 during regular business hours (M-F 7am-7pm, Sat 8am-1pm), email us at firstname.lastname@example.org or stop by one of our branch locations and one of our friendly team members will happily help you find an option that work best for you.