6 Top Reasons Why People Apply for Personal Loans (And Whether They’re Good or Bad!)
Are you thinking about getting a personal loan? If so, you’re probably like many other people who have wondered whether getting a personal loan is a good idea and whether you’ve got a valid reason for obtaining one.
One of the best things about personal loans is that it’s tied to you, not what you plan to spend the money on, which gives you flexible cash when you need it. If you have good credit and just want some additional spending money, you can likely do just that – though that way will surely lead to debt problems down the road.
So, what’s a good reason for applying for a personal loan? Let’s have a look at the top reasons why people apply for a personal loan, and when that’s a good or bad idea.
6 Reasons People Apply for Personal Loans
1. Dealing with Debt
Taking out a personal loan can be beneficial if you need to consolidate debt, particularly if it is a large amount but manageable. Debt consolidation allows you to make just one payment each month, i.e., paying off the personal loan, instead of a lot of payments throughout the month. And better yet, you should be able to get a lower interest rate for the personal loan than of the debts you were paying before.
In September 2019, Experian surveyed 210 customers who were considering applying for their first personal loan and found that 40% of these customers were looking to take out the loan for debt consolidation.
Good or Bad: Debt consolidation – especially in the case of credit card debt – is almost always a good idea. A personal loan ensures you pay off that debt within a certain time frame and makes managing your payments much easier. The only time this is a bad idea is if you move the debt into a loan, only to build up your credit card debt again, digging you further into a hole.
2. Home Improvement Projects
In that same study by Experian, they found that 35% of people inquiring about personal loans wanted to apply to pay for work on their homes. In 2018, HomeAdvisor noted that customers were spending an average of $7,560 on home improvement projects, $1,105 on the maintenance of their homes, and $416 for emergency home improvement costs.
Good or Bad: Provided you can afford the payments, and you aren’t investing in a property you don’t own or won’t see a financial benefit from, home improvement projects are another good choice for a personal loan. Home renovations (even on a small scale) are pricy, and if you do it right, you’ll increase the value of your home.
3. Purchasing a New Vehicle
Next up is using a personal loan to buy a new vehicle. Sometimes, our old car gives out, and we don’t have thousands of dollars lying around to purchase a new one. In that case, applying for a personal loan to buy a new vehicle is a must, especially if you need one to get to work or for essential travel.
Good or Bad Idea: Good – especially if your car financing payments would be significantly higher than your car finance repayments. Better still, you actually own the vehicle, so if you had money trouble, you can talk to your loan company, and they’ll help you find a way to pay, whereas a car finance company will simply take the car back.
If you’re thinking of taking out a personal loan to buy an additional car for pleasure, think seriously about if you can afford the repayments and if the deal on the car you’re thinking of is really as good as you think.
Many people take out personal loans to travel or to take a vacation. The Experian study previously mentioned found that 23% of those looking to apply for a personal loan were considering using it to travel or take a vacation. In 2019, Bankrate observed that 52% of Americans planning to go on vacation predicted costs on average of $1,979, and Americans in their 30s were predicting costs of $2,366.
Good or Bad: Since travel is purely for pleasure, think long and hard about why you want to borrow money instead of saving up for it. Are you getting impatient? Have you been wooed by marketing that says you’ll never get such a good deal again? Are you going to get FOMO (fear-of-missing-out) if you don’t go with your friends? Consider if this trip is worth still paying off in 2-5 years’ time. Sometimes, you’re thinking of that trip of a lifetime, but if it’s not that trip, it may not be a good idea.
5. Medical Bills
A lot of people will turn to a personal loan to pay off medical bills after suffering from a serious injury or illness, such as a major car accident, cancer, stroke, or a heart attack. If you have health insurance, you will be extremely lucky if it covers all of your medical costs, and if you have no health insurance at all, medical bills can cause massive financial problems. A personal loan can help you to manage these costs.
Good or Bad: Good. Double-check if there are any repayment plans, but if you need to get a personal loan to pay for medical bills, then that’s what needs to happen.
6. Starting a Small Business
Many people take out a personal loan to give them the cash to start a side-hustle or small business.
Good or Bad: If you are looking to start a small business, but your start-up costs are too small to make it worth applying for a business loan, a personal loan could work well for you to purchase the software or equipment you need to get started. Just make sure you have a plan in place before you jump in.
Do I Have a Good Reason to Apply for a Personal Loan?
You need to think about what the consequences may be if you take out a personal loan. Due to interest rates, it may be beneficial to simply save up for something like a large purchase or vacation, so you don’t end up with the added costs.
If you are thinking about applying for a personal loan to cover emergency costs, you need to be sure that you won’t have to cross that bridge again further down the line. If a personal loan is just going to give you debt on top of debt, there is not a good reason to take out a personal loan.
However, if you know that your borrowing is under control and you’re ready to make a positive change in your life, a personal loan can be just what you need to take that next step!
How Do I Apply for a Personal Loan?
Before you apply for a personal loan, always make sure to compare interest rates and terms of the lenders to ensure that you are getting the best deal, since you’ll be paying for the money you borrow.
We do just that for you – simply tell us about yourself using our easy application, we’ll compare loans and lenders to get you the one best suited to your circumstances, then you pick the best one, agree to the terms, and you’ll get your funds in just a few days. It’s as easy as that! Check out our How It Works page for more information and to find your best personal loan offer.