Loans often get a bad rap because many people think that debt can tarnish an otherwise good credit record. Debt is often associated with improper handling of finances and bad financial decisions. In reality, loans bring several benefits to people that manage their credit wisely. It can help cover immediate expenses that may arise from sudden illnesses, emergencies, or when you go beyond your monthly budget. You may also obtain a personal loan to fund your business venture or pay for home or vehicle repair costs.
What is a Personal Loan?
Before we go more in-depth on how personal loans can help people, let us define what a personal loan is. Personal loans are forms of credit with a specific settlement date. Sometimes referred to as a multipurpose loan, this type of borrowing can be utilized for a variety of purposes. It can be used to pay for home improvements, to cover the costs of your car repair, pay for hospital bills, and consolidate debt. It can be used for almost anything, as long as the purpose is legal. Using a lender with a good reputation is important to ensure an easy loan application.
There are different types of personal loans, but these usually fall in two main categories:
- Unsecured personal loan: The main attribute of an unsecured personal loan is that the borrower isn’t required to provide any form of collateral to secure the loan. If you can’t pay back the money that you owe, your assets are at risk for repossession. However, the lender may still take steps to recoup what you owe them by sending your account to a collection agency. If you’re not careful, your credit score will be negatively affected, preventing you from getting other loan deals in the future.
- Secured personal loan: To obtain a secured personal loan, the borrower must provide collateral as a guarantee for the loan. The most common examples of secured personal loans are mortgages and car title loans. In case you fail to make payments on schedule, the loan provider has the option to seize your property or asset to recoup the amount you owe. Secured personal loans typically grant higher loan amounts compared to unsecured personal loans.
There are various sources of personal loans – you can obtain one from a regular bank, an online lender, or a credit union. Different lenders have different requirements and qualifications, so it’s vital to check whether you’re indeed qualified to take out a loan.
How Personal Loans Help Borrowers
If handled properly, a personal loan offers many benefits and advantages to borrowers. Here are the ways a personal loan can help borrowers.
- A personal loan is an easy and quick way to get financial aid.
When you’re low on cash, and you need access to cash immediately, a personal loan is your best option. While you can ask for a loan from people you know, there’s no guarantee someone can extend their financial help at such short notice. Fortunately, some lenders offer quick personal loans that you can get in as short as a few hours if you meet the lending requirements.
- A personal loan can help stop credit card usage.
Although a credit card is also considered a type of personal loan, it carries exorbitant interest fees that can leave the borrower in a pile of debt. A personal loan can be used to consolidate multiple credit card debt to make repayments more manageable.
- A personal loan is suitable for any purpose.
Some loans can only work for a specific purpose, but you can use a personal loan for almost anything. You’ll not be restricted to use the loan proceeds for a particular need, giving you the freedom to spend it as you want to.
- A personal loan is settled more conveniently than other forms of borrowing.
A personal loan can be repaid much easier than credit cards because of the fixed payment schedule. You can be free from debt sooner if you religiously follow the repayment plan.
- A personal loan can improve your credit score.
Surprising, but, yes, a personal loan can help improve your credit rating if you don’t incur any late or missed payments. Otherwise, your credit score will suffer if you don’t manage your debt responsibly.
A personal loan is a financial instrument that benefits a person who uses it wisely. If you badly need cash, a personal loan is a quick, safe, and viable option. You should take note, however, that you’ll be legally responsible for repaying the debt as declared in the terms and conditions of the loan.