Personal loans are those where you are not putting up any sort of collateral, so generally you need better credit to qualify, and even with great credit the interest rate will still likely be higher than for a mortgage or car loan, since the lender is taking more risk (there’s nothing they have right to repossess if you default). That said, there are many reasons why people take out personal loans, and several of these reasons can actually save you money compared with the alternatives.
One of the best reasons to take out a personal loan is to pay off a lot of high interest debt – such as credit card balances – and then you gain a few advantages:
- reducing the interest payment by having a lower interest personal loan versus the high interest card balances
- consolidating the outstanding debt into a single bill and having just one payment per month
- regaining the flexibility of using the credit card as a payment card with more purchasing power – just don’t let debt build up on the credit card again, or you may find yourself over your head between the personal loan and new credit card balances!
There are other popular reasons that folks take out a personal loan:
- pay for a once-in-a-lifetime vacation
- purchase a vehicle from an individual (these are harder to get traditional auto financing for, but see our auto loans page for more details about this)
- making other large purchases where retailer credit or using a credit card and maintaining a large balance would be more more expensive – such as home furnishings or appliances
- medical procedures not covered by insurance
At Credit Wizard we’re here to advise, not to judge, so none of these reasons are bad, but some do earn a word of advice. If you’re obtaining a personal loan every year for vacation, then it’s no longer “once-in-a-lifetime” and it’s likely not sustainable, because the cost of the vacation is not increased by just your annual rate of interest, it grows more than that if you take a multi-year loan. Similarly, many providers of large home products (furniture and/or appliances), or medical providers are aware of the needs of their customers to provide payment plans, and many more have attractive financing options with low interest rates, even if just for the first 12 months. Use our calculator to understand when to get a personal loan versus using the financing your retailer or provider can arrange.