When Should You Take Out a Personal Loan?
Jun 21, 2022
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You never know when life will throw you a curveball - a personal loan can help you navigate life's ups and downs without having to stress if a significant expense arises.
To finance a large purchase
Perhaps you need to buy a new car, complete renovations on your home or plan a wedding. A personal loan can help you spread the cost of these big life events and purchases, making it easier to manage your budget month to month.
To pay for a medical emergency
On the flip side, many of us know the stress of falling ill and needing to pay for expensive medical care. Maybe you need help to pay unexpected medical bills, or if you’re fortunate enough to have health insurance, you may need to cover a high deductible. Taking out a personal loan to cover medical bills can be one way to help ease some worry at a time when you should be focusing on recovery.
To refinance debt
Personal loans can also be used to consolidate previous debts. Refinancing multiple debts into one loan can make repayment easier to manage and even save you some money on high-interest rates.
Whatever the reason it’s needed, a personal loan can help you manage your finances by providing a lump sum amount that you pay back in regular installments over a set amount of time.
The Process
Getting approved for a personal loan can be an easy and quick process providing you have the right information to hand.
Most providers will allow you to apply online with a quick response to whether they can grant your loan. If approved, they will connect you with a loan specialist who goes over the finer details of the offer, verifies your identity and confirms your supporting information. Once that's all done, you simply review and sign the loan agreement, and your funds will be with you by the next working day.
Your Eligibility
Your eligibility for a loan, and the subsequent interest rates/terms offered, depends on a handful of factors. Each financial institution has its own criteria for applicants, but as a general rule, the following are taken into consideration:
- Your financial and credit history (including if you have ever filed for bankruptcy),
- Current income and expenses (this is to make sure that the repayments will be affordable)
- The purpose of the personal loan
- The value of the collateral (if applying for a secured loan)
- Your state of residence.
Secured or Unsecured?
A secured loan is backed by an asset you own; this asset is called collateral. Common examples of collateral for a secured personal loan could be a car or jewelry/property with a significant value. If you default on the loan agreement, the lender can take possession of the collateral property to clear the remaining balance you owe.
An unsecured loan is where there is no collateral needed to back the loan. Lenders face a higher level of risk with unsecured loans, which means that the amount offered for the loan can sometimes be smaller, have a higher interest rate, or are only available to those who meet specific credit score criteria.
The bottom line
You should take out a personal loan when you need money to cover an emergency, or if you want to finance something and expect you’ll have no difficulty fitting its monthly payments into your budget. Be sure to calculate the overall payment of the loan, including its interest rates and any applicable fees so you can best understand if it’s a good fit for you.
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