By Andrew Housser
Personal loans have growing appeal. They are especially helpful for consumers whose credit scores do not reflect repayment capabilities. That is because today’s new independent lenders use different criteria than a traditional bank or credit union to evaluate how likely a person is to repay a loan.
People consider personal loans for many reasons. Since April is Financial Literacy Month, we looked at some of the most common uses of a personal loan, and the pros and cons of each.
1. Debt consolidation. Consolidating credit card debt is one of the most popular uses for personal loans.
Pros: Life can be simpler when you make only one monthly payment. Personal loan interest rates are generally a bit lower than credit card interest rates. You will clearly see the impact of each monthly payment – something that may be hard when you are juggling multiple credit cards. Some personal loan lenders even offer a discounted rate if you use the proceeds to repay credit card debt and transfer the loan proceeds directly to creditors.
Cons: Like any debt consolidation method, personal loans can mean trouble if you are not careful. When you take out a personal loan to repay credit cards, you must be conscientious about not continuing to rack up debt. Otherwise, you will end up with more total debt than you had before.
2. Medical bills. Medical bills can add up quickly.
Pros: If you lost working days due to illness or injury, you may benefit from a financial boost as you get back on track. If you had an unexpected or costly medical experience, a personal loan might be a way to get the breathing room you need while your health and your finances recover.
Cons: If medical needs have made it impossible to work, a personal loan is not a good choice. You may not be able to repay the borrowed funds. A personal loan also is not the solution if you have accumulated very serious medical debt and are struggling to make minimum payments, as well as on other debt you may have. In this case, debt negotiation may offer a better alternative.
3. Vacations. The best idea is to fund your vacation with savings. Sometimes, though, a personal loan is tempting when planning “the adventure of a lifetime.”
Pros: A personal loan could be a way to fund an important trip if you do not have other significant debt, and you have constraints that make it impossible to save for your vacation.
Cons: People with other unsecured debt obligations – such as credit card debt – should not borrow more money for something that is a “want” vs. a “need.”
4. Weddings. Even the most budget-conscious couples can find wedding expenses overwhelming.
Pros: When cost-cutting and careful planning is not enough, a personal loan might be an option. They can be useful when you do not have other significant debt, and when repayment fits into the newlywed budget.
Cons: Common wisdom notes that couples argue most about money. Do not saddle your new marriage with years of overwhelming debt payments that can put your financial future at risk.
5 House-related expenses. A personal loan could help with remodeling, repairs or renovations. Some consumers also use personal loans to pay for major long-distance moves.
Pros: A personal loan can be helpful when you need to pay for projects ranging from installation of a new roof to completion of a major kitchen overhaul. If you need to move to a new location for work, and your company does not pay for the relocation, a personal loan can help pay for expenses of moving the household and vehicles.
Cons: For homeowners who have equity in their homes, a home equity line of credit may be a better option. For those looking to use a personal loan for moving expense, the key is to be sure that the income coming from that new job will allow paying off the personal loan.
If you are considering a personal loan, make sure you can make the regular payments. Most personal loans are issued for a period of 36 to 60 months, and have strict monthly payments and timelines. When a consumer has the required discipline, personal loans can serve as valuable financial tools.