A personal loan is often considered the loan that comes when you are not buying a house or car. The irony is that while this is one of the most common ways of borrowing money, it’s something that few people are aware of as a personal option to manage their finances and either make improvements or simply cover upcoming expenses without getting too far into financing and higher interest rates.
In reality, we usually never have the money we need when we see the right opportunity. We always think about how if only we purchased that house ten years ago, or started that company, or something else. There are always opportunities that we wonder about but the fact is that if money is the reason that we are not able to take advantage of an option that we want, a personal loan may offer the solution.
How Is A Personal Loan Different?
Unlike your traditional options for borrowing money, when you take out a personal loan you may not be taking it out to purchase something specific like a home or vehicle. Instead, you may be borrowing the money for a variety of reasons and therefore may not have the collateral of the property or vehicle to cover the amount borrowed. Instead, collateral is based on other possessions or financial options that you have available but cannot make liquid at this time.
Why Should You Take Out A Personal Loan?
There are several reasons why you should consider borrowing money. However, one thing that is rarely discussed is how everyone has to consider their own situation. There is no strategy that works for every single person and your specific situation will influence your decision. If you can improve your finances by borrowing money, you have the opportunity to do so and change your situation in the short-term rather than the long-term. Some examples include:
- Pay off debt: It may seem like an unusual idea to borrow money to pay off other debts. However, it is a proven and effective strategy if your current debt comes with it a higher interest rate than that of the rates you would get now if you borrowed money. The most common example of this is with credit card debt, especially if it is over $10,000. At that rate, the interest payments would be very high and make it even more difficult to get the debt paid off.
- Investment options: Just as you can save money by borrowing, you can make money by borrowing. In many cases, employees who love their job want to invest more in the company because they know it’s going to continue to grow. However, because they are only able to invest in small doses at a time, it is the longevity of their commitment that will pay off. For some, that’s not good enough and that’s why they take out a low-interest loan to purchase stock in their company or other companies they really believe in.
- Down payment: If you are interested in buying a home, especially because the monthly payment for a mortgage would still be cheaper than your rent costs, you may not be eligible to because you do not have enough for a downpayment. In this case, many are able to borrow the money for a down payment and then pay off that loan while also being able to comfortably handle mortgage payments.
- Home repairs: Over the years, even the best built homes will need work. This can get expensive and financing may come with higher rates. Instead, borrowing on your own may be the most economical decision and allow you to quickly get the repairs and upgrades you need.
It’s easy to say that these are some of the main reasons why people should take out personal loans, but there may be reasons that you are considering as well. Instead of focusing on whether you should take out a loan or not, look at the financial situation you are currently dealing with and look for ways to improve it. If you cannot find ways to do that without an influx of money, perhaps that will give you some additional perspective.
When To Borrow
Everyone has a different theory on when to borrow. For example, many believe that you should never borrow when the interest rates are high. However, that’s when many find the best deals on homes, properties and other things they can purchase if they have the funds available to make the transaction. It’s important that whenever you are borrowing money that you take into consideration your current debt. More than your credit score or even your income, your debt-to-income ratio will influence how much you can borrow.
Without a strong ratio, you cannot prove to lenders that you will be able to cover the payments and repay the borrowed funds. It’s one of the reasons why so many people are unable to borrow the funds they need to make major purchases and why you need to work on that before you try and borrow the money. However, if you are borrowing the funds to help pay off other debt, you may be able to work something out with the lenders as it’s a form of refinancing and therefore the lenders will all benefit from the transaction.
Invest some time into researching personal loans and the options they offer you. The best way to manage your money is to understand what your costs are, what your income is, ways to improve both and ways to improve your ability to borrow as well. That way, even if you do not need it, acquiring thousands of dollars from a lender will not be difficult.