How to Use a Personal Loan

Borrowing money can help you out in all sorts of areas 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. 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 and some of the common things they can be used for.

What is a Personal Loan?

Broadly speaking, a personal loan is money you borrow from a financial institution that’s meant for your own personal use. Certain 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.

3 Reasons to Consider Using a Personal Loan

As important as it is to understand what a personal loan is, you also need to understand how and when to use them. Here are some common situations where a loan might be able to help you out.

1. Help with Emergency Expenses

One common use of a personal loan is to help with emergency expenses. While your first line of defense should be your emergency fund, a personal loan like a line of credit can act as a safety net when your savings won’t cut it.

If you end up needing some financial help, an online loan might be an option to look into. These types of personal loans may have a fast application process, and if you’re approved, you might be able to get access to money as soon as the same business day. 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. Supplement Funds When Your Student Loans Aren’t Enough

If you’re in college, you already know how expensive it can be to be a student. 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 you need to buy an extra textbook, then a personal loan may be able to help if you don’t have the savings to cover these expenses.

3. Help with Home Repairs

If you run into an emergency home repair and need some financial help, a personal loan could be a short-term solution. This could be for anything that needs to be dealt with right away, 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 helpful in these types of situations. They typically have lower interest rates than the unsecured short-term personal loans we’ve been talking about, but they also come with some risks and things to consider.

First off, you’ll need to own your home to qualify. Secondly, if you can’t make your loan payments, the lender could take your collateral – in this case, your home – in lieu of payment if things get bad enough.

Learn More About Personal Loans Before Applying

If you use them carefully, personal loans can be helpful in all sorts of different situations. 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 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.

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.