You might want to consider a personal loan if you need to borrow for a relatively short and specific period of time. Personal loans can run from one year to five years. For example, if you have a lump sum of money coming to you in two years but you do not have enough cash at present, a two-year personal loan can be a way to cover your needs.
A secured personal loan will require you to present collateral or financial assets you own, such as a home or a car. These high-value properties can be utilized to pay the lender if you default on your loan. Collateral serves as a hedge for lenders to ensure that borrowers will repay the loan on time.
- Consolidate credit card debt
If you owe a considerable balance on several credit cards with high-interest rates, taking out a personal loan to pay them off can save you money. For example, suppose the average interest rate on the credit card is 9.49%, and the average rate on the personal loan is 9.41%. In that case, the difference should allow you to pay the entire balance faster with lower interest rates in total. Moreover, it is easier to track and pay off a single debt instead of multiple ones.
- Pay off high-interest debts
A personal loan may seem more expensive than other types of loans. But it isn’t the most expensive. For example, payday loans have far higher interest rates than personal loans from banks. Likewise, if you have an old personal loan with a steep interest rate, replacing it with a new loan can save you some money. But prior to switching to a new loan, make sure to determine whether there is a prepayment penalty on the old loan as well as application fees on the new one. In some cases, those fees can be substantial.
- You are financing a home or a big purchase
If you purchase new appliances, install new structures to your home, or make a significant purchase, opting for a Secured Personal Loan can be less costly than financing via the seller or billing everything on your credit card. But if you have a home equity loan, this could be less expensive. But bear in mind that these are secured debts, so you are putting your home on the line.
- Paying for a major life event
Major life events like big-ticket purchases can be less expensive if you pay for them via a personal loan instead of a credit card. According to a 2021 Investopedia survey, one in 5 US couples utilizes loans or investments to pay for the wedding. But as necessary as these events are, you might want to consider being more conservative rather than going into debt for the long term. For that same reason, getting a loan to fund a vacation may not be a good idea unless you consider it the trip of a lifetime.
- Improve your credit score
Taking out a personal loan and paying it on time can uplift your credit score, especially if you have had a history of missed payments and incurred other debts. If your credit card report mostly shows credit card debt, incorporating a personal loan might help with the mix. Having various types of loans and showing how responsibly you handle them is considered a plus for your credit score.