People take out personal loans all the time for a lot of different reasons. It’s a popular type of loan, especially for amounts under $1000. Besides being easy to get, there are a number of other good reasons why they’re a good choice to make.
If you’re on the fence about how to get your hands on some cash, here’s a more in-depth look at why personal loans are still the best bet in town.
You Won’t Have to Put Up Any Collateral
Financial institutions have a lot vested in you when they lend you money. That’s why they ask for collateral — something you put up to secure the loan. It might be some valuable jewelry you have (an engagement ring?). If you’re getting a car loan, you might offer up your other car as collateral.
Pretty much anything of value that you own outright can be a candidate for collateral. If you don’t pay back the loan, that collateral goes to the bank so they don’t completely lose their shirts on the deal. Want an example of how this works? Think about the all-too-familiar scenario when things go south on an auto loan… repossession. That diamond ring used to secure the loan? Gone forever if you should default.
All this points to what some consider the beauty of a personal loan: there’s no collateral involved. It’s what they call an unsecured loan.
You Don’t Have to Have Great Credit
And on a side note, financial institutions like banks and other traditional lenders do offer personal loans. The problem is, the best interest rates are only available if you have great credit.
It Won’t Take Eons to Get the Loan
Have you ever tried to take out a loan for a house or a car? It’s a journey, to say the least!
Personal loans are quite the opposite. Getting a personal loan is a much simpler process. It’s not rare that you could even get your loan approved within one day.
Lenders Let You Use it for Just About Anything
Mortgage loans and other traditional loans aren’t just complicated and slow. They’re also totally rigid when it comes to how you use the money. In fact, you won’t ever see the money with a mortgage because those funds can only be used to buy property. The money you borrow goes straight to the bank account of the person who’s selling you the property.
In general, when you take out a personal loan, it’s cash that you can use for whatever you like. It’s a lump sum of cash directly into your pocket to spend as you please. Of course, there are good and bad reasons for taking out a personal loan.
And as diverse as people are, those reasons go up and down the spectrum of smart and not-so-smart. Take a look:
Some Good Reasons for Taking Out a Personal Loan
- Paying your medical bills
- Starting an emergency fund
- Fixing up your home
- Paying for an unexpected event, like a broken AC
- Starting a side hustle. Depending on the stats you see, anywhere from 15% to 25% of people in the workforce have created their own side jobs. It takes a bit of cash to set up your own business (unless you’re planning to hire yourself out as a day laborer!).
- Life events. There are some milestones in life that are too important to scrimp on. Paying for a wedding comes to mind. So does paying for the funeral of a family member .
- Getting rid of expensive credit card debt. This is by far the most common reason for taking out a personal loan.
- Refinancing credit card debt. Combined with the previous reason, these two credit card solutions are the reason that almost two-thirds of borrowers take out personal loans.
- College tuition. Investing in your future — that can’t wait, right?
- Moving can be a huge expense, very worthy of a personal loan.
Some Questionable Reasons for Taking Out a Personal Loan
- A Beyoncé & Jay-Z-type vacation. A $30,000 vacay for you and the kids. It’s a fun idea and it shows well-placed intentions but is it really practical? How about a smaller version instead, where you only borrow $1000 and start a small savings account to fund the rest?
- A ring good enough for royalty. A $376,230 sapphire ring just like the UK’s Princess Kate has. Nice, but you can get a similar piece of jewelry (and who will know the difference) for around $1000.
These are “questionable” reasons for getting a personal loan but who’s to say what you should or shouldn’t do with the money you receive? After all, one of the main benefits of personal loans is that you are free to do whatever you please with the money. And anyway, most lenders who aren’t tethered to the policies of the big banks won’t even ask you why you want the money. This list is here only to give you some basic guidance and perspective on personal loans. You will need to think about your own reasons and whether they are valid reasons in your own mind.
All of This Applies to All Types of Personal Loans
Personal loans aren’t just fast and flexible… they come in all shapes and sizes, too. In fact, the term is sort of a catch-all phrase that also includes other personal loan terms you may have seen:
- Short-term loans help you bridge the gap between your income and what you need to pay your bills.
- Payday loans are for when you just need a quick solution and you’ll be able to pay the loan back the next time you get paid.
- Installment loans are when you’d like to be able to pay back your loan over time.
And in addition, you’ll see other options out there, aimed at people like you (who need cash).
- Cash advances online are for times when you need the cash pretty much immediately
- Bad credit loans are for when you’re at your last resort for getting a loan
- No credit check loans are good for when you don’t want your FICO score to be affected
It’s a dizzying world of loan choices but keep in mind the guidelines we’ve outlined above when you’re shopping around. Weigh your decision carefully, be sensible about the amount you borrow, and choose the right type of personal loan for your unique circumstances. Borrowers who follow this path will always come out ahead.