Life has a way of throwing you curve balls. Just when you think things are going well, you're hit with a medical emergency and a hefty ER bill. Or you might have years of credit card debt that seems impossible to dig your way out of. In some cases, borrowing money, in the form of a personal loan, is often the quickest solution to dealing with a surprise bill or high-interest debt. If you haven't given much thought to personal loans, there are a few reasons why you should.
How Are Personal Loans Different from Other Loans?
As Equifax points out, a personal loan is a type of unsecured debt. That means there's no collateral to back the loan up if you stop making payments on it. In contrast, secured loans include mortgages, which use the home as collateral, and car loans, which use the vehicle as collateral.
Since personal loans are unsecured, credit unions and other lenders typically charge a higher interest rate on them than they would on a secured loan. The rate you get offered is usually based on your credit score. The better your score, the better the interest rate.
Personal loans are also different from credit cards. When you open a credit card, you get a revolving line of credit and a credit limit. You're able to borrow and repay the credit infinitely, until you or the card company cancel the account. With personal loans, you receive a lump sum amount, which you then pay back in regular installments for a set number of months or years.
Uses for Personal Loans
People take out personal loans for a variety of uses. One of the most popular reasons to apply for a personal loan, according to Bankrate, is to use the funds to pay down or consolidate other debts. If you have a balance on several credit cards, all of which charge a high interest rate, you can save money in the long run by using the money you get from a personal loan to pay off those debts.
Other common reasons to take out a loan include paying for major life events. Some people use a loan to pay for a wedding or to cover the cost of a long-distance move. Personal loans can also be useful if you have an unexpected, sudden expense, such as a hefty auto repair bill or a large medical bill.
What to Think About Before Applying for a Loan
Before you apply for a loan, there are a few things to consider. One of the most important things to think about is whether or not you'll be able to pay back the loan based on the payment terms. How much other debt you have can determine whether or not you can afford to take out an additional loan.
As the Consumer Financial Protection Bureau notes, it is usually a good idea to keep your debt to income ratio below 43 percent. That means that all of your loans and debts combined shouldn't be more than 43 percent of your gross (pre-tax) income.
It's also a good idea to make sure you're getting the best rate possible on the loan. If your credit score isn't too great, it's wise to try to raise it before you apply for a loan. You might also consider exploring other loan options, based on what you want to purchase or how you plan on using the financing.
Coosa Valley Credit Union has a variety of loan products. To learn more about your options and to see if a personal loan is right for you, contact our loan department today.