Personal loans are one of the most commonly used financial tools in the modern world. People use them for various reasons, ranging from financing their personal enterprise all the way to covering financial emergencies. Still, there are a lot of those who dread the idea of getting indebted, out of fear that they’ll find themselves trapped in a vicious debt cycle. Keep in mind, nonetheless, that this is not something that can happen on accident or on its own. By being responsible and having the right reason to get a personal loan, you can easily avert this kind of financial crisis. With that in mind and without further ado, here are the top 6 reasons why getting a personal loan can be a good thing.
1. Saving money and assets
The first major reason to get a personal loan is the fact that this method allows you to avoid selling an asset. You see, scenarios in which you need a loan vary from one case to another but what they all have in common is the fact that you’re in a scenario where you need more money than you actually have. In this scenario, a lot of people opt to sell family heirlooms, property or personal vehicles, which is a decision that they often come to regret. Keep in mind that once you sell your assets, you’ll, most likely, be unable to buy them at the same price. Which means that you either lose an asset or lose money.
Another reason why getting a loan actually saves you money is due to the fact that it provides you with a chance to pay less. Buying something on credit usually comes with a higher interest rate than if you were to make an immediate payment. This is a neat trick that retailers and sellers use to incentivize immediate payments. The simplest way to “cheat the system” is to apply for a minor loan and make a purchase. This way, you get a new asset without spending more than you have to.
Finally, provided that you already have some debts (and credit payments) you are losing money in a steady, gradual manner. This can be quite problematic but it’s not without a solution. By getting a new loan to cover all your existing loans, you won’t reduce the amount of money owed but you do get access to a lower interest. In the end, this method, also known as debt consolidation, allows you to end up paying less. Not only that but it also allows you to reduce the number of financial obligations that you currently have. This makes it easier to meet all your financial obligations on time.
2. Improving your credit score
When it comes to an unsecured credit loan, the majority of lenders will want to know your credit score. With some lenders like OurMoneyMarket, this is one of the three major determining factors (next to the amount that you want to borrow and the loan term that you need). The score itself is a three-digit number on a scale from 300 to 850. The bigger the score, the better you’re off.
Before we start talking about how you can improve your credit score by getting a loan, we must first understand what goes into a credit score. Generally speaking, there are five major factors here. The first one is the payment history. This is a metric representing how vigilant you are when it comes to your previous payment. The way in which consolidation helps you with this factor is fairly simple – by having fewer monthly payments to meet, the chances that you’ll miss one on the accident are lower. Then you have the amounts owed (which remains unchanged), length of credit history, new credit and the credit mix. This last part is how many different types of credit you have, at the moment. This too is something that you can fix with consolidation.
One positive factor regarding this is a chance to enter a positive debt cycle. You see, a negative debt cycle (it’s far more common counterpart), is a scenario where you get a new loan to pay off the old one (the one that you were unable to pay off, to begin with) only to end up with more debt. Seeing as how this scenario results in paying less (lower interest), you’ll be on the right track to rid of yourself of debt, indefinitely. The reason why this is called a positive cycle is due to the fact that, as your credit score improves, every next loan that you apply for will have better terms. This means that once you set your foot on this path, things will start looking up.
3. Financing your own business
One of the interesting things about a personal loan is the fact that it can be used to finance your own business. In fact, the majority of people use personal means to finance their first enterprise, regardless if they’re using their savings, a loan or selling an asset. This method is also far superior to a lot of different methods that are widely used by potential entrepreneurs. For instance, by borrowing from friends and family, you risk deteriorating personal relationships. Making a pitch for potential investors is far from easy and there’s no guarantee that it will work (even if your idea is ingenious). Selling an asset is something quite definitive and we have already discussed some of its ramifications. With a personal loan, you have it all firmly in your hands.
The next thing worth discussing on this topic is the fact that personal loans have a series of benefits over business loans. For instance, they require less paperwork, which is a simple and straightforward way to facilitate these things. Second, the lender usually requires security, which is why unsecured loans could be off the table. The restrictions are also fairly numerous, which means that the chances that you’ll get approved for a business loan are substantially higher than when it comes to a personal loan.
One last reason why getting a personal loan to finance your business is a great idea is due to the fact that you get to keep all the equity. You don’t have to take on partners (at least not for financial reasons) and you’re in no way restricted when it comes to the control of your own company. Most importantly, once the business becomes profitable enough, it should be able to cover the loan on its own, which is already a huge boon.
4. Paying for unexpected expenses
The reason why so many people use these loans is in order to pay for unexpected expenses. Keep in mind that it can happen to anyone and you just have to find a way to handle it properly. Ideally, you would dip into your emergency fund and cover the expenses from there but what happens if you don’t have one? Well, the simplest solution is to get a personal loan and be done with it. Keep in mind that, in the aftermath, it is always smart to establish an emergency fund, so that you don’t have to resort to this method again. Ideally, the fund needs to be big enough to cover at least three months of your expenses. So, if you need about $3,000 to get by a month, the fund should have at least $9,000 in reserve.
Keep in mind, nonetheless, that there are all sorts of financial emergencies that you have to keep in mind. For instance, you could lose a job (even in the most stable of markets; even if your performance is absolutely stellar). In this case, you would find yourself in the middle of the so-called income crisis, which is definitely something to be alarmed about. Then, you may find yourself in a scenario where you suffer an illness or injury. In this case, you would have to cover medical bills (which can be substantial), while being kept away from work. Then, you may need a major repair (to your car, bathroom or heating system). All of these factors are just some of the scenarios in which getting a personal loan would be a great idea.
5. Having all the information
The next thing worth mentioning is the fact that a loan provides you with all the information you need in order to sleep soundly at night. You see, at the very start, you’re told everything and you have a privilege to develop your own financial plan and a projection. For starters, you have a clear break-even point, as well as a predictable repayment schedule to base your repayment strategy on. A lot of people even choose to automate these processes, which can easily be done with a simple request to the issuer of your credit card or a brief negotiation session with the bank behind your main account.
The key thing to making all of this work is that you get just as much loan as you need, no more, no less. So, start by making an estimate of your monthly credit payment and add this expense to your already existent financial obligation. We’re talking about your broadband plan, your utilities, your rent (if you have one) and your mobile plan. Then, try estimating how much you’re paying on groceries and how much you’re setting aside for your emergency fund. Once you combine all of these expenses and compare them to your monthly income, you’ll be able to see whether you can afford the credit in question, to begin with.
6. Superior to credit card
Lastly, if we’re going to talk about the benefits of personal loans, we need to briefly compare them to credit cards. When it comes to this, personal loans have so many benefits. For instance, it’s substantially easier to manage a personal loan than multiple credit card accounts. Due to their limit (which is often considerably smaller), you’ll need at least several credit cards in order to meet the amount of a single personal loan. Also, keep in mind that (due to the reasons that we’ve already discussed) a loan is far better for your credit score.
One more thing that we’ve hinted on in a previous paragraph is a higher borrowing limit. Sometimes, you need a certain amount of money in order to finance a major project. We’re talking about starting your own business, buying a home, paying for a wedding, etc. In this scenario, the amount of money that you need will exceed the amount that you can get from any single credit card. Going for one loan instead of several credit cards is simply more intuitive.
Another thing worth discussing is the fact that credit cards have a lower borrowing limit and in order to ramp-up their profit, they tend to increase their interest rate. Seeing as how the amount that you’re borrowing isn’t that great, it’s substantially easier for you to endure even a preposterously high interest rate on this credit card. Now, combine enough of these credit cards and what you’ll get is a financial disaster. With a personal loan, you have a potential for a lower interest rate
Lastly, with a personal loan, you get a longer repayment term than some of its alternatives would offer you. Now, this can be both good and bad. You see, the longer the repayment term, the lower your monthly credit payment will be. The problem, however, usually lies in the fact that you’ll end up paying more (in total). Also, there are some people who find the very idea of being indebted quite unsettling. These people want nothing more than to just pay off their debt and be over with it. For them, the sooner they can pay off the loan, the better. Still, there are some personal loans that allow you for an early loan payoff. In other words, it’s not like you have to choose one or the other.
In conclusion
Even with all the above-listed in mind, getting a personal loan is not something that you should do lightly. This is a major financial decision, which is why you should take situational factors into consideration, do your research and go shopping for the best deal possible. This way, you’ll get to reap all the above-listed perks and benefits.
