Why you might need a personal loan

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For many individuals and families, personal loans are a financial tool meant to help out in varying circumstances. You can use them for a variety of reasons, such as needing to pay off some credit cards or if you need money, but don't have the necessary funds saved up.

According to Mint Life, these types of loans are unsecured. This means you don't offer up any collateral in order to get the loan, which typically arrives as a lump sum.

As with any financial tool, it's important to understand all the necessary details, and when you should explore those options. Being able to receive money in a short amount of time is great, but you must also have a plan in place to eventually pay back the loan.

person holding money and using a calculator
Personal loans can help you pay off credit card debt.

Personal loan details
Personal loans can essentially help you close a gap in your budget, no matter the size. In an ideal world, everyone would be able to live off their monthly income and cover all their expenses, which typically range from living costs, to food, bills, utilities and setting money aside in savings accounts.

In almost every instance, lenders will take a look at your credit score to help determine if you should get a loan, and at what rate. Mint stated that personal loans usually come with better interest rates [1].This gives them an advantage over using a credit card, for instance.

But unlike credit cards, personal loans come with fixed terms, meaning you will pay them off in installments. Credit cards, meanwhile, come with varied interest rates and revolving terms.

Most personal loans come with a two- to five-year repayment term. Depending on your current and future financial situation, this time period might be more than enough to pay everything back.

Why your credit score matters
Credit scores have a big impact on the finer details of a personal loan, especially with regards to the interest rate. The better your score, the lower the rate.

If your score is a bit lower than what most lenders like to see, you can still get obtain a personal loan, but the interest rate might be equal to or higher than that of a credit card. You have to be careful and decide if the higher interest rate is worth taking out another loan, because your monthly payments will be higher. You then open yourself up to the possibility of missing a payment and falling behind. Missed payments can remain on your credit score for up to seven years, according to the credit rating agency Equifax [2].

Example uses
There are several instances in which it makes sense to get a personal loan, and the first centers around consolidating your existing debt. If you have multiple credit cards with existing balances, and student loans with high interest rates, it makes sense to take out a personal loan to pay everything off and then start to pay back the loan.

"Personal loans must be used responsibly."

Emergency situations may arise where you need money quickly and don't have enough saved. There are countless reasons why you might need a personal loan, but regardless, you should use it as a tool to help you get your finances in order, and not as a facilitator to go out and buy new gadgets you don't need.

Use loans wisely
Personal loans must be used responsibly. You can't get a loan just for the sake of having extra spending money. You should only look to get a personal loan if an emergency dictates it, or if you want to get your finances in order.

By using a personal loan to consolidate your debt, you must also change your previous spending habits that led to high amounts of debt in the first place. If you use a loan to pay off multiple credit cards, consider cancelling them after eliminating existing balances.

Personal loans are a valuable tool that can help you get a better grasp on your finances, but you must use them with caution.

[1]. Does It Make Sense to Take a Personal Loan?

[2]. What You Need to Know Before Taking Out a Personal Loan

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