A personal loan is a versatile loan that can be used for almost any purpose, including debt consolidation, unexpected expenses, or large purchases. You will need to pay off the loan amount with interest in fixed, monthly repayments. For example, rather than slowly saving money over time for a much-needed home or vehicle repair, you can just take out a personal loan to cover the expense if it’s urgent, then repay the loan in convenient payments.
Personal loans can be used for almost anything. Personal medical loans seem to be the most common but other uses for personal loans include home improvements, debt consolidation, and large expenses, but they can’t be used for college fees, investments, or down payments.
How personal loans work
Personal loans are unsecured, so lenders don’t ask for any collateral. The general terms and conditions that a personal loan comes with are-
- Repayment term
The repayment term is the number of years over which you have to repay the personal loan, typically it’s one to five years. The number is sometimes reported in months instead of years, such as 24 months instead of writing two years.
- Interest rate
Interest rate is the percentage of the principal amount the lender charges the borrower to finance the loan. Different lenders will charge different interest rates based on your credit score, credit history, income, and financial requirements.
- Monthly repayment
This is the total amount you will be repaying each month, including principal, interest and fees. You must repay each month or you might be charged with additional late payment penalties.
What Can You Use a Personal Loan For?
There are several things you can use a personal loan for, some make more financial sense than others. You can consider taking out a personal loan for the following circumstances:
- Debt consolidation: Consolidating your old debts or high-interest credit cards with a low interest personal loan can save you time and money, especially if the loan doesn’t come with an origination fee.
- Medical bills: Before you take out a personal loan, try to negotiate with your healthcare provider and see if you can set-up a no-interest instalment payment system. If that is not an option, a personal loan can help you take care of your medical debts.
- Home repairs & renovations: You can use a personal loan for home improvements, necessary repairs, or remodelling projects. If there are any urgent home repairs, then a small personal loan can help you sort things out.
- Large expenses: When you don’t have the cash upfront to buy an appliance like a new computer, mattress, or any other item you need, you can take a personal loan to purchase it. You can then pay it off over the pre-defined time with small repayments.
- Moving costs: Shifting is expensive and will likely cost you thousands of dollars, more if you are shifting long distance. If you don’t have the cash to make the move, consider taking out a personal loan.
Your credit score directly affects your eligibility to get accepted for a personal loan. The most favourable loan terms are reserved for people with high credit scores. Hence, it might make sense to take the time to improve your credit, if you don’t need the loan urgently, before applying for the personal loan. It’s also important to shop around before settling on the lender to ensure you get the best terms. Make finding the lowest interest rate your first priority, but also consider application fees, repayment terms, and reviews of the lender. We hope this helps you understand the best circumstances where you can apply for a personal loan.