When Should You Take Out a Personal Loan?
You might be reading this article and thinking to yourself, “what’s the point of taking out a personal loan when I already have student loan debt to pay off?” This question isn’t entirely unfounded, as it goes against common sense to take out loans while you’re still trying to settle existing debt.
Therefore, it’s difficult to give a direct ‘yes’ or ‘no’ when it comes to taking out a personal loan. What’s most important to remember is the fact that taking out a personal loan is a huge financial decision that needs to be properly planned properly.
What is a personal loan?
An individual takes out a personal loan from a bank or another financial lending company for—you guessed it—personal reasons. Banks and lending institutions rely on your credit history, income, and employment records in order to see whether you’re eligible for a loan (aka likely to repay).
Personal loans are taken out for a fixed amount of time, anywhere from one to five years. It’s rare to take out a loan for shorter or longer than this time period, and it’s largely a case-by-case basis.
From the lender’s perspective, personal loans are risky as they aren’t backed against assets. This means that you have to be sure you can repay your loan, but it also means that the interest rates on personal loans are generally higher.
Despite the risks that come with personal loans, people still take them out. In fact, CNBC reports that personal loans are on the rise among millennials this particular age group made up over a quarter of last year’s loan applicants. The report lists emergencies as a common reason why personal loans are taken out, but some millennials are consolidating loans as a way to pay off high-interest debts.
When should you take out a personal loan?
If you’re someone who’s currently struggling with student loans, a good starting point is to figure out what options you have available to you. After all, our post on ‘7 Student Loan Secrets You Will Not Want to Know About Student Loans’ says that you could even get sued for not paying your loans on time.
The beginning of this article mentioned asset-based loans. This can be a good alternative, especially as student debt is rising everywhere from Connecticut to Ohio. As a result, students have been considering title loans in Ohio as flexible options to help with debt relief and provide an alternative option to taking out money. An auto loan provides less risk than a personal loan as the bank can just auction your car should you default on your payment. You can also use your car even after taking out a title loan, which is a godsend for those who use their car as the main means of transportation.
It’s good to know, however, that an auto loan isn’t the only option available to you. The Balance notes that informal loans from family and friends are still a great way to go, just keep in mind that maintaining trust is crucial in such scenarios. Personal credit is also another alternative that allows you to take money out as needed (capping at a certain limit) rather than a huge amount all at once.
It’s difficult to outline when you should take out a personal loan, as circumstances and financial needs will differ with each person. If you do take out a personal loan, just remember to be diligent about paying it off and ensure the money gets used wisely. Good luck!