The ability to borrow money can help to facilitate a lot of things in your life. It can help you buy a house, a car, or even help you deal with an emergency expense. But it’s not something you should do without having an understanding of how it works and what’s at stake when you apply for a loan. They can be expensive, you’ll be taking on debt, and your credit history could be affected.
One thing that can sometimes get people in trouble is a lack of understanding of when and how they should be using a personal loan. They can be a convenient way to access funds when you need them, and technically, you can sometimes use this money for whatever you’d like. But misusing them can come with consequences. Different personal loans have different intended uses, so you should always use them for what they were designed for.
Today, we’re going to go over what a personal loan is, some of the things they can be used for, and how to qualify for one.
What is a Personal Loan?
Broadly speaking, a personal loan is money you borrow from a financial institution that’s intended for personal use. Certain personal loans are designed for a specific purpose. For example, if you needed a loan to buy a house, you’d apply for a mortgage. If you needed help buying a car, you would look for an auto loan. And if you’re a student who needs additional help paying for college, you would use a student loan. You can look for personal loans online or go through a financial institution’s brick and mortar location.
While in some cases, a financial institution may want some assurances that you’re going to use the money for a specific purpose, this won’t always be the case. And it bears repeating; just because you might be able to use a personal loan on whatever you want, doesn’t mean you should. Different types of personal loans have different intended uses for a reason, so you should generally use them for what they’re meant for.
4 Ways to Use a Personal Loan
While it’s important to understand what a personal loan is, it’s also important to understand how and when to use them. Although the examples below aren’t the only uses for personal loans, they’re some of the more common ones. Let’s dive in.
1. Help with Emergency Expenses
One of the main uses of a personal loan is to help you deal with emergency expenses. While your first line of defense should be your emergency fund, an emergency personal loan can act as a safety net when your savings won’t cut it.
If you do run into an emergency and need financial assistance, you may want to consider looking for personal loans online. These fast personal loans often have quicker application processes than storefront loans, and in some cases, you may be able to get your funds as soon as the same business day if you’re approved. Just be aware that an emergency personal loan may come with higher interest rates and/or fees than certain other types of loans, so they should only be used as a last resort in emergency situations.
2. Opportunity to Positively Affect Your Credit History
If you have poor or thin credit, you might have a harder time getting approved for larger loans like mortgages, or qualifying for loans with more favorable rates. So, how can you get a loan? Well, with a small dollar, short term personal loan, you may have an easier time getting approved. And if the financial institution you’re approved by reports your payments to a credit bureau, you may be able to add positive entries into your credit history as long all your payments are on time.
It may also be able to help your credit score by adding more variety to your credit history. For example, if you only have revolving credit accounts, adding an installment loan to your history may help to diversify your entries. Just keep in mind that credit mix is only one factor in determining what your credit score is, and you should also never take on more debt just for this purpose.
If you do end up looking for a personal loan but don’t have the best credit score, you may have an easier time getting approved if you have a co-signer on board. Read more here about what a co-signer is and the potential risk they would be taking on.
Additionally, if you’re looking for other ways to positively affect your credit history, there may be other options out there for you. You could look into secured credit cards which will enable you to access a line of credit by securing it with a cash deposit to the financial institution. You’d then have access to a credit limit equal to the amount you’ve deposited.
3. Supplement Funds When Your Student Loans Aren’t Enough
If you’re in college, you may already be familiar with all the expenses that come with being a student. And you know that an education doesn’t come cheap. When all your savings and income are tied up in school expenses, a personal loan may help to plug in some of the gaps.
Like we mentioned earlier, personal loans don’t come cheap, so they shouldn’t be used unless absolutely necessary. But if your car breaks down and you have no other way of getting to class, or the professor adds an extra textbook to your reading list and the only way for you to get your hands on a copy is to buy one, then a personal loan may be able to help if you don’t have the savings to cover these expenses.
Just remember that before you apply for a personal loan in a situation like this, explore other options first. There may be federal student loans that come with better rates, or you may be able to apply for a grant which you don’t need to pay back.
4. Help with Home Repairs
If you run into an essential home repair and need some financial assistance, a personal loan may be able to help. If your needs are urgent, then these fast personal loans may be able to get you the money you need as soon as possible. This could be for something like a broken furnace or a burst pipe.
Alternatively, if you’re taking on a big home improvement project and you’re not sure what your exact budget is going to be, you may want to look into a home equity line of credit (HELOC). These are lines of credit that you secure with your equity in your home, and can be handy to have in these types of situations.
How to Qualify for a Personal Loan
If you feel like you’re in a situation that could be helped by a personal loan, it’s important to understand the steps that need to be taken in order to get approved. While requirements will vary between different financial institutions, here are some things you can do to prepare.
1. Get a Hold of Your Credit Score
The first thing you’ll want to do is to take a look at your credit score. This may help to give you some idea of what type of loan you might be approved for, as your credit score is sometimes a big factor in determining what type of rates and terms you qualify for. To see your credit score, you can:
- Purchase this information from either a major credit bureau (TransUnion, Equifax, or Experian), or buy it from FICO.
- Find a service online that will give you your credit score for free.
- Comb through your loan or credit card statements, as some financial institutions may provide this information for their customers.[1]
2. Research Your Options Online
Next, you should always make sure to do your research to see what type of options may be available to you. Whether you’re looking for personal loans online or in person, you should be able to look online and see the different rates and terms offered by different financial institutions.
3. Get Your Personal Information Ready
If you’re applying for a loan, you’re more than likely going to need to provide certain personal information. To make the application process as fast as possible, try to get this info together ahead of time. This could include things like proof of income, bank account information, and your Social Security number.
Learn More About Personal Loans Before Applying
If used properly, personal loans can be useful in all sorts of different scenarios. They can help you handle emergency expenses, they can help you out as a student or a home owner, and they can help you make life-changing purchases. But they can also do some damage if they’re misused. If you take on more debt than you can handle, you could damage your credit history, pay more interest than you can really afford, and be left in a cycle of debt that could be tough to get out of.
The key in this whole equation is to understand when personal loans should be used, and to only apply for them when you need them and can afford them. Make sure to always do your research before making any big financial decision, and we hope this article has helped!
Disclaimer: This article provides general information only and does not
constitute financial, legal or other professional advice. For full details, see
CreditFresh’s Terms of Use.
[1] https://www.equifax.com/personal/education/credit/score/how-to-check-credit-score/
[2] https://www.annualcreditreport.com/index.action
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