Everyone who takes out a personal loan does so for their own specific reason. But although everyone’s circumstances are different, most loans can be put into one of several common categories. Here are the top five reasons people might want a loan, and what you need to think about in each case before applying.
1) Financing a Car
It’s relatively easy to be approved for car finance at a dealership, but there are two major drawbacks to taking that route toward vehicle ownership. If you’re buying new, you’ll usually need to make a substantial down payment, often of up to 50 percent of the sticker price, a sum which is out of reach for many.
And if you’re buying used, you’ll often pay a high interest rate, and may even be pressured into taking out extra warranties and so on to get a better deal.
Taking out a mainstream loan for buying a car avoids these difficulties, helping you get behind the wheel with less hassle and at a lower cost.
2) Debt Consolidation Loans
If your credit cards, store cards, and loan balances are starting to build up and becoming difficult to manage, debt consolidation is a time-honored way of getting your finances back into shape. When done correctly, debt consolidation can reduce your monthly payments, simplify your finances, and stop your creditors sending letters asking for payment.
However, most debt consolidation loans are secured, meaning that you need to put your home up as collateral to receive a good rate. If you get back into trouble with your payments, you could find losing your home is a genuine possibility. Because of this, consolidation loans should be taken out with care, making sure you’re fully able to keep up with the new repayment schedule.
3) Home Improvements
Another common use of a secured loan is to improve the home it’s secured on. Whether you want a new extension, an attic conversion, or even an extensive kitchen remodel, a home improvement loan is a great way of providing the finance. And the best point is that a carefully done improvement project will increase your home’s value, in effect paying off a large chunk of its own cost.
4) Vacation of a Lifetime
If you have a far-flung destination on your bucket list, then a loan can help you take the journey without worrying about the costs you’ll pick up on the way. But while finance is great for these once-in-a-lifetime trips, it’s not so suitable for your regular annual vacations. Unless you take out a loan with a very short term, you could be paying for your week or two away for much longer than the happy memories last.
5) Funding a Lavish Wedding
Lastly, today’s weddings can be incredibly costly affairs. But if you want a lavish day to remember, then taking out a loan will ensure you can afford to get every detail exactly how you want it. And of course, it needn’t be you who’s getting married: a personal loan is a great way for a parent to make their child’s special day truly memorable.
But no matter what you use a loan for, it’s important to treat your application with the seriousness it deserves. The effects of falling behind on payments can have a long-lasting impact across large areas of your life, and so you should only take out credit when you’re 100 percent sure you can handle the costs.