- Posted by: Administrator
- Category: Finance
Need to fill gaps in your budget this month or pay for a large purchase? Understanding how to take out a personal loan is the first step to securing the funds you need to cover temporary, short-term expenses.
Top 3 questions (and answers) about how to take out a loan
Before applying for a loan or resorting to other short-term lending options, check out our answers to the most frequently asked questions about taking out a personal loan.
1. Is it a good idea to take out a personal loan?
Depending on who you are and who you ask, the answer will vary. Personal loans are unsecured, which means they don’t require collateral from the borrower. Because of this, the interest rates on personal loans are typically higher than what you’d see on a home mortgage or auto loan.
Even so, taking out a loan may still be a good option, especially if you meet the following criteria:
You need to pay for a large purchase
If you need to make a major purchase―like a new appliance or replacing a leaky roof―the interest rate on a personal loan might be better than your credit card APR or in-store financing options. If you take out a loan and pay the seller in cash, you may end up better off in the long run.
You want to consolidate credit card debt
The same principle applies to credit card debt. A personal loan can be used to consolidate multiple outstanding credit card balances into one monthly payment. The APR on a personal loan could be lower than the interest rates on your credit cards, especially if they are close to being maxed out.
You have a large event to pay for
Say, you’re getting married. Rather than charging the wedding costs to a high interest rate credit card, you can take out a lower rate personal loan to cover the expenses. This option will not only give you the time you may need to pay the money back, but there’s a very good chance you will save on interest charges. (Just make sure the personal loan APR is lower than your credit card APR).
You want to improve your credit
While not a guarantee, a personal loan may help improve your credit score—especially if your current credit report shows credit card debt as your main type of credit. A loan can help diversify your “account mix” and may lower your credit utilization ratio.
2. How do I get a small personal loan?
When your budget is tight or your credit card bill is higher than usual, a small personal loan may help cover a temporary spike in your monthly expenses. A small personal loan can be a great way to borrow exactly what you need without taking on a surplus of additional debt.
Because they are less profitable than home mortgages and auto loans, many major banks won’t offer small personal loans. However, plenty of reputable online lending marketplaces offer access to lenders that do offer such loans.
Regardless of your lender, it’s important not to take on more debt than is absolutely necessary to cover the expense.
SOURCE: LENDING CLUB BLOG