How to Use a Personal Loan?

Personal loans are a convenient way to break up your high expenses into manageable monthly payments. They are a good option for people planning to make big purchases as it’s easy to apply and approve. 

However, this also requires us to thoroughly understand how personal loans can be used, the factors to keep in mind, available alternatives, and more.

How Do Personal Loans Work?

To understand how do personal loans work, we need to first grasp the types of personal loans. Typically, there are two types of loans -

• Secured personal loan - Requires collateral to back the loan
• Unsecured personal loan - Does not require any security or collateral

Unsecured personal loans are more popular among borrowers as they don't have any security and collateral concepts. However, if you default on the loan payment, the lender can file a lawsuit against you. This can also hurt your credit Score.

With a personal loan, you receive a lump sum of money in your bank account with a fixed interest rate and repayment tenure. The loan paid-off period differs from lender to lender based on specific loan terms.

How to Use a Personal Loan?

The interest in using personal loans has surged — people are increasingly taking personal loans for various reasons. Some of the major ones are as follows -

• Debt Consolidation
• Home Renovation
• Medical Expenses
• Buying a Car
• Dream Wedding
• Vacations

1- Debt Consolidation

If you’re juggling multiple debts, consider a personal loan. Debt consolidation is one of the best uses of personal loans.

Let’s say you have 2-3 loans with higher interest rates. However, as you improve your credit score and profile, you can get a personal loan at a much lower rate.

In this case, you can simply take the loan and combine it into a single loan. You can then pay the loan into easy monthly payments at a lower interest rate. This also allows you to repay the debt quickly and without much interest.

2- Home Renovation 

If you’re planning to renovate your home, a personal loan can be a practical choice. Whether it’s to refurbish just a few things like windows, doors, wallpaper, and more, a personal loan can provide the funds you need. However, home equity or home loans are also an option, but this is ideal for large home improvement projects.

3- Medical Expenses

As you know, a minor medical procedure can cost a lot and disbalance your financial planning. A personal loan can help you cover all the medical bills including hospitalization expenses, cosmetic procedures, the fertilization process, braces, and more.

4- Buying a Car 

If you prefer to avoid the hassle of securing a car loan or if your credit history or salary isn’t ideal, a personal loan can be a great alternative to help you buy the car you want.

5- Dream Wedding 

Weddings are a big event in one’s life and everyone dreams of making it special. Personal loans can help you manage your certain wedding expenses such as booking a venue, dinner, ring ceremony, and more helping you create a wedding of your dreams.

6- Vacations

You can use a personal loan to plan a trip with your family and friends. It allows you to enjoy unforgettable national and international trips. If you’re struggling to save for your next vacation, consider a personal loan as an alternative.

What to Think Before Taking a Personal Loan?

If you are searching how to get a loan for personal use, there are certain things you should look at.

• Determine your Loan Purpose

Indeed, personal loans are easy to get but you shouldn’t take this lightly. You should be clear about the purpose.

Let's say, you have to buy a car and decide to take a personal loan. But what if a car loan has a lower interest rate than a personal loan? In this case, taking a car loan is more favorable as lower interest rates means lower overall costs and potentially less risky.

So, you should be clear about the purpose of the loan and its use.

• Interest Rate

Before applying for a personal loan, you should be aware of the interest rate charged by the insurers. If debt consolidation is your goal and interest rate is lower than the existing loan, this can be a better fit. Generally, Applied Rate (AR) and Effective Interest Rate (EIR) are the two common interest types that you will come across while applying for a loan.

• Fees and Charges 

While interest rates are a key component of personal loans, be aware that additional fees and charges may also apply.These can include late fees, tenure change fees, and more. So make sure to understand these additional charges while applying for a personal loan. 

• Impact on Credit Score

Every personal loan impacts your credit score. To attain a good credit score, it is essential to make timely payments. Consistent and timely payments can boost your score and showcase your reliability to lenders. Conversely, failing to repay a personal loan on time can lead to a decrease in your credit score.

• Choose the Right Lender

When looking for a personal loan from various sources such as banks, credit unions, and more, it’s important for you to find the right lender. To do so, compare interest rate, repayment tenure, how much funds you can get, and the reliability of different lenders. Choose one that fits better.

Everything you Need to Know about Personal Loan Eligibility

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