How to Decide Whether a Personal Loan is a Good Idea

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The following article is a guest post.

Although the idea of taking out a loan could strike fear into your heart, it can actually be a good idea in some circumstances.

For example, a home mortgage is a type of loan that you take out from your banking institution to allow you to own your own home. In this case, your home would be your collateral. An auto loan helps you afford a new or new-to-you vehicle, and the vehicle itself is your collateral.

A personal loan is a bit different.

Because there is usually no real collateral offered to the bank to secure the loan for them. Therefore, it is called an unsecured loan.

You will often find that interest rates are higher for personal loans than they are for home or auto loans.

Your credit score will help the financial institution determine what interest rate they offer to you. While good credit scores will win you lower interest rates, there are plenty of financial institutions that do not follow such strict rules and still offer loans for people with bad credit.

Personal loans can technically be used for nearly any personal and legal purpose.

Be aware though that some financial institutions will ask you how you plan to use the money. A personal loan should be used carefully and should only be taken out when you have a clear idea of how and when you will be able to pay it off.

There are many bad reasons to take out a personal loan, but the following four reasons may provide a valid argument for you to look into this type of loan.

Reasons to Take a Personal Loan

1. To Make Home Improvements.

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It may be much wiser for you to choose a personal loan rather than a home equity loan for a home renovation. This will ensure that your home is not used as collateral and will keep you safe from possible foreclosure.

Be sure to use this option if you know that you will get a return on your investment, such as from increasing the amount your home is worth.

2. To Refinance or Consolidate Debt.

By far, the biggest reason why people take out personal loans is to pay off debt. In fact, 49 percent of personal loans are taken out for this reason. Even with bad credit, the interest rate on a personal loan is usually far lower than that of a credit card.

Additionally, if you are not getting sufficient tax advantages from your student loans, you may want to consider paying for your student loans with a personal loan.

3. To Improve a Credit Score.

Taking out a personal loan for any reason and then repaying it on time can significantly help your credit score. This is because you are diversifying your credit portfolio with an account mixture.

In addition, if you have a lot of credit card debt, a new personal loan can improve your credit utilization ratio.

4. To Pay for Medical Expenses.

Using a personal loan to pay for medical expenses is a bit more of a judgment call. It should only be used if your health insurance does not cover the expenses. And if the interest rate provided by the loan is cheaper than that provided by a payment plan at your medical facility.

However, medical care is not cheap. At some facilities, some expenses must be paid before doctors or other medical professionals will continue providing care.

Only you can make the judgment call as to whether or not a personal loan is right for you. If you are sure that you have no other way to pay for something and that you will be saving money overall with your new interest rate, this type of loan may be a good choice.

However, if you have no way to pay back the loan after you use the money or if you want to use the money for risky behavior, such as gambling or playing the stock market, this would not be a wise use of money.

Personal loans do have numerous benefits, such as flexibility and the option to fund large expenses without putting them on a credit card with a steep interest rate.

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