Like any financial matter, there are a lot of pros and cons when it comes to taking out personal loans. It could put you at risk of falling deeper into debt, but it could also be a valuable lifeline and help build your credit.
While you should avoid borrowing money to pay for a vacation or a wedding, there are are some situations where it’s a good idea. These are the best reasons to get a personal loan.
1. Consolidating and paying off your debt
If you’re trying to reduce how much you owe, one of the best ways to do that is by consolidating your debt. That’s when you take out a new loan to pay back multiple loans.
You typically do this when you can secure a lower interest rate, reducing the total amount you have to pay. For example, the national average credit card APR reached 16.38% in January 2018, according to CreditCards.com.
Meanwhile, personal loan interest rates can start at less than 5.00%. That equals huge savings in monthly payments.
It can also help if you want one monthly payment since having multiple payments to many loan providers can be overwhelming. Remember to research many personal loan lenders to ensure you’re getting the best rate.
2. Making home improvements
You should really only take out a loan when it helps reduce your debt or is an investment in something that will be worth more in the end. An example is making improvements to your home.
By using a personal loan to update a kitchen or bathroom, you’re increasing the value of your home. When you go to sell it, you could make more on the sale than you owe on the loan.
Also, if you use the money to swap in new energy-efficient appliances, you could save money on your monthly electric bill.
Research other loan possibilities if this is your reason for borrowing money because a home equity loan or line of credit could be a better option.
3. Improving your credit score
A personal loan could help improve your credit score in a few ways:
Since you’d take out a loan at a lower interest rate than the debt you previously had, your debt would decrease faster.
If you have a lot of credit card debt and this loan is being used to pay back those bills, your account will show a mix of credit.
Having a personal loan increases the total amount of credit you have available to you, so you’d lower your credit utilization ratio. That ratio is a calculation of how much credit you’re using versus your credit limit. The lower the ratio, the better.
Improving your credit score is often a byproduct of another reason you’re taking out a loan, but it’s still an important factor to consider. Be confident you’re making the right decision because not paying back the loan on time could damage your credit score.
4. Investing in career advancement courses
Like investing in home improvements, investing in your education to advance your career is one of the best reasons to get a personal loan.
Although you can’t use a personal loan to pay for traditional college tuition (you can choose from private student loans for that), you could use it to pay for professional development courses.
The hope is these classes would help you secure a higher-paying job or teach you a new skill to start a side hustle. Before taking out a loan, check to see if you can save up for the class or work out a payment plan directly so that you don’t have to incur interest.
5. Starting a business
Whether you have some new skills from that professional development course or have a great business idea you want to pursue, a personal loan is a good way to get that side business up and running.
The money you make from your new venture should first go toward paying back the loan. But, hopefully, the initial boost should put you on track to make much more than you borrowed.
You should also know there are small business loans, so that’s another option you should look into before settling on a personal loan.
Best reasons to get a personal loan
Not having money to cover your debts or pursue your dreams can be frustrating. But that’s exactly why personal loans exist. They can be used to cover many big expenses, such as home improvements or education classes, that will lead to financial success in the long run.
Some of the best reasons to get a personal loan are that they can be used to consolidate current high-interest debt, something that would also lead to a healthy financial portfolio.
Just be sure you don’t fall into the trap of using a personal loan for a bad reason such as a wedding or vacation. After you borrow the money, you want to come out on top, not in more debt.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|