What Are Personal Loans Used for?
- Consolidating existing debt
- Make a large purchase
- Unplanned emergency costs
- Payday loan alternative
- Moving costs
Personal loans are typically used by borrowers to help make large purchases or alleviate unexpected financial difficulties. Once approved, these loans are usually paid back in monthly installments for a period of between 1 and six years, depending on your exact circumstances.
If used correctly and paid back promptly, personal loans can be hugely helpful in certain circumstances. Here are the main reasons why borrowers choose to secure a personal loan.
Debt consolidation
Taking out a personal loan to help consolidate debt is a common reason. By taking out a loan to consolidate multiple loans or outstanding credit card debt, you can make it easier to pay them all off.
Otherwise, you will be having to deal with a variety of interest rates and balances which could make it harder to keep a track of. It leads many to feel overwhelmed by their debt.
However, a personal loan helps alleviate stress, and benefit from lower interest rates than you would with other loan types.
By being able to take advantage of lower rates, you can help reduce the overall amount of interest you need to pay back. You can also reduce the amount of time taken to pay all the debt back, and with a clear end in sight too.
Making a Large Purchase
- Household appliances
- Vehicle
- Weddings
A personal loan can be hugely helpful when it comes to making large purchases. For example, you may find that one of your vital household appliances (fridge, washing machine, etc) suddenly breaks down, and you don’t have the immediate funding to replace it. This is where a personal loan can be extremely beneficial.
A personal loan means that you can immediately purchase major household items without having to spend months saving beforehand. This makes taking a personal loan very convenient for many.
Others decide to use a personal loan to purchase items such as a vehicle, if they are struggling to get access to a secured loan with a lower interest rate.
Alternatively, using a personal loan to pay for wedding costs is becoming increasingly commonplace. This can be used to pay for things such as the venue, entertainment, as well as smaller expenses on the day. As a personal loan provides flexible repayment options with lower interest rates it can be a more affordable alternative to using your credit card.
Unplanned Emergency Costs
A personal loan can be used to cover unexpected emergency costs – for example, your car suddenly breaks down, or to help with funeral expenses. Situations like this can have a huge drain on resources, but a personal loan can help cover the costs.
Alternative to Payday Loans
A personal loan is often a much better alternative to taking out a payday loan. This is because it is common for people to take out a payday loan without fully understanding the potential repercussions. For example, many payday lenders charge high levels of interest meaning that borrowers can end up having to pay back significantly more than they thought. Payday loans can be useful if they are used correctly, but if not, they can have huge pitfalls.
A more straightforward way to get access to money quickly is through a personal loan instead. There are fewer risks involved, and you can usually benefit from a much lower interest rate.
Moving Costs
A personal loan can help you cover the costs associated with moving house. This is less likely to be a problem if you are moving somewhere close by, but if it is long distance there can be a lot more additional costs to take into consideration.
Things to consider when looking at personal loans
- APR
- Duration of the loan
- Repayment plan
- Terms and condition
- Credit score
If you are comparing personal loans, you should be making sure you have carefully considered things such as the APR, the duration of the loan, repayment plans as well as terms and conditions.
Whilst it can be tempting to opt for a larger personal loan (they usually offer lower interest rates) stay sensible and only take out what is needed. Overborrowing has the potential of leading to financial difficulties in the future, and it may even harm your credit score. Your top priority should always be that you can financially afford to meet repayments promptly and fully now and in the future.
Nevertheless, if you are looking to apply for a larger personal loan you should take a look at your credit score beforehand. It can be harder to get approved for larger personal loans due to the level of risk to the lender. As a result, it may be worth seeing if there are ways you can improve your credit score before applying, to increase your chance of being accepted and getting a better rate.
How to manage a personal loan
You should always prioritise managing your personal loan effectively, as it can help to improve your credit score and reduce repayment stress. Here are some of our top tips for doing this:
- Keep a monthly budget and stick to it, making sure you always have enough cash for loan repayments
- Keep to the repayment schedule to avoid incurring penalty fees or harming your credit score
- If missing a payment seems unavoidable contact the lender as soon as possible to discuss alternatives
- Try to avoid applying for more loans whilst still making repayments on an existing loan. It could lower your credit score, and put a strain on your finances.
