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When do you need to take out a personal loan?

Written by Kyle Moore, blogger.

Life can be unexpected, especially when it comes to money. While in an ideal world, no one would need to apply for a personal loan, things can happen in the real world, and the need for financial assistance is more common than one would think.

In most cases, applying for a loan can help alleviate the financial burdens you may face. But, this still doesn’t mean that opening up a line of credit isn’t a big deal and that it doesn’t require a lot of thought and planning.

We understand that the thought of taking out a loan can be daunting, and sometimes even when you’re struggling financially, adding more to that doesn’t seem justifiable. This is especially true if you’re someone who has never taken out a line of credit or loan before or someone who tries to keep their debt to income ratio low.

This article discusses when borrowing money from a lender makes the most financial sense.

To work on home improvements

One of the most justified reasons for applying for a personal loan online or at the branch is because you’d like to do home improvements or renovations. Home renovations cost a lot of money, from labour, material and accommodation (should you and your family need to stay someplace else). Many South Africans cannot afford the expense of it all, and with the cost of living soaring, this means people won’t be able to afford any home improvement until they save for years to come.

This can be a problem as sometimes home improvements are more of a need rather than a want, as the home needs maintenance for it to be a safe and conducive environment to live in. Taking out a loan for home improvement also makes financial sense, as you can get a return on investment from your home in the future if you decide to sell it, and it will be worth more due to the home improvements, which is always a plus.

Pay off credit card debt

Consolidation loans have become more popular over the years. If you have a large balance on store accounts and credit cards with high interest, applying for a personal loan can help you pay it off and save money. The personal loan may have a lower interest rate in comparison to your store account and credit card debt. You can use a personal loan to settle those accounts.

This not only helps you save money, but it also helps lower stress. When you have too many accounts deducted every month, it can cause stress and anxiety. When you consolidate your debt, you can have peace of mind knowing that all your bills are paid, and all you have to do is stick to one monthly payment. This also helps you keep track of what and how much you owe. If you’re someone who prefers their things to be simple and straightforward, then debt consolidation may be a plus for you.

Help improve your credit score

To build and keep a good credit score, you need proof that you can handle a line of credit. How much credit you use and how well you pay your accounts are two certain ways that can help you improve your credit score.

However, if you have been trying to improve your credit score to either purchase an asset or for any future endeavours, having a personal loan can help you out. Adding a personal loan can work in your favour as it counts in your credit mix. A credit mix refers to a variety of lines of credit on your profile. For example, you can have a credit card, cell phone account, vehicle finance or a personal loan.

This is used to determine how you handle different types of debt. If you only have credit card debt, applying for a personal loan can help improve your score when you need a good score in the future.

Needing assistance for a major life event

Life happens, and there are always unforeseen events around the corner. Whether it’s a traditional ceremony, wedding or important schooling event like graduation, most people want to celebrate big moments with their friends and family. And, while you can always save up beforehand, you can never be certain if you won’t need additional financial assistance.

Applying for a personal loan rather than using your credit card means that you can work out an affordable monthly instalment with reasonable interest rates rather than using a credit card with a high interest rate. Credit cards usually have a higher interest rate because they are an unsecured loan which means borrowers are given a loan without the guarantee of repaying it. With a personal loan, you can rest assured that you have a manageable interest rate.

To make a big purchase

When you need a big purchase for your personal life, this is the best time to apply for a personal loan. With a personal loan, you can purchase the item you need and repay it in affordable monthly repayments that fit your budget and needs.

Most big purchases cost a lot of money, and depending on their urgency, you may not have enough time to save up for it. This is where personal loans can be lifesavers. And you can decide on how quickly you’d like to pay for this purchase. Most lenders give customers between 12 months to six years, so you also have control over how you’d like to repay the loan.

Settle payday loans

If you have more than credit card debt, taking out a personal loan can be helpful. For example, if you have found yourself stuck in a vicious cycle of payday loans, then getting a personal loan instead can be helpful. Payday loans aren’t the ideal solution as you have to repay the balance in full with interest the following month.

This can lead to someone re-borrowing money again to stay afloat after the payday loan deduction. It can become hard for you to settle this debt. If you or someone you know has experienced this, getting a personal loan and settling your debts can be the only effective way out.

You can pay off the payday loan and repay that balance on the personal loan on affordable monthly instalments that can get you out of debt.

Final thoughts

Taking out a personal loan can be overwhelming as many different registered credit providers offer financing. It’s always important to remember to only take out a line of credit when you need to, when it makes financial sense, and can help you better your life and financial situation. Always make sure you use a reputable lender and don’t believe what you read online.

Instead, if you are unsure, contact a branch and speak to a consultant who can give you all the information you need before applying online. We hope these tips will help you determine when you need to take out a personal loan.

[Image – Photo by Scott Graham on Unsplash]

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