How to Determine if a Personal Loan is Right for You
educating-myself | Read Time: 3 minutes
By Susan List | Published: June 2021
With interest rates at record lows, there has been a huge focus on Americans borrowing money for new homes, home remodels and long-delayed weddings or vacations.
In many homebuying or remodeling instances, people take out a mortgage or use their homes’ equity to fund a new purchase or improvements to their existing homes.
But what about homeowners who haven’t built up enough equity for a large remodel? Or renters who have a large wedding to pay for or want to consolidate debt?
That’s where a personal loan could be beneficial.
What is a Personal Loan?
A personal loan is an unsecured loan, meaning a borrower does not need collateral to obtain the funds. Personal loans are set for a fixed amount and paid off over a fixed amount of time at a fixed interest rate so there are no surprises for the borrower over the life of the loan.
When considering how to pay for a large purchase, like a boat or home remodel, or to get a better handle on debt, many people turn to personal loans through their bank.
While personal loans can be used to pay for almost anything, there are some recommended uses – and uses that are not recommended – for personal loans.
What Are Good Uses for Personal Loans?
For many borrowers, a personal loan has a lower interest rate than credit cards, making it a great way to consolidate and pay off higher interest debt or pay for a planned expense like a wedding.
The better a borrower’s credit, the better rate they will likely receive. Borrowers looking to build up their credit score while paying off debt can benefit from a personal loan as well, with the fixed terms and rates helping to set a budget and longer-term financial goals.
For homeowners who want to invest in and remodel their home but don’t have enough equity to borrow from, a personal loan is a good option as well. It’s important to make sure the project adds value to your home, not an expensive remodel that is ultimately superficial.
When Should I Consider Other Options?
If you have the option to use savings or can wait to save for a large purchase, that is a sound financial strategy to follow. Likewise, if you have enough equity in your home, consider a home equity loan or line of credit (HELOC) for your project as the rates will likely be better than a personal loan.
It’s also not recommended to use personal loans for medical bills if you can avoid it – try setting up a payment plan with your healthcare provider first.
And while discretionary spending, like family vacations, are typically not recommended ways to spend personal loan funds, there can be exceptions when your savings won’t cover the expenses. A personal loan is still likely going to be cheaper than adding these expenditures to your credit card or depleting your savings entirely and wiping out your emergency funds.
However you decide to pay for your home improvement project, consolidate debt or fund a large purchase, it is important to stay within your means when taking out a loan. Don’t borrow more than you can comfortably pay for monthly and throughout the life of your loan.
About the Author – Susan List
Susan List is Senior Vice President, Director of Consumer Lending for WSFS Bank, holding various leadership roles with the Bank for nearly 23 years.
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