Money is tight and you have some unexpected expenses coming up. Or maybe you’ve had a major expense like car repairs that you can’t afford. A personal loan may be the answer to your problem, but you should know why and when you should get one.

 

What are Personal Loans?

Also referred to as installment loans, personal loans are generally short-term loans that have no collateral to back them. You can get a personal loan from a brick-and-mortar bank or finance company or one of the many financial lenders online.

 

With a personal loan, your personal reputation is what is used to back your payments. What this means is your income and credit history will determine how likely you are to pay the loan back.

 

How Do You Qualify for a Personal Loan?

You’ll find lenders that take people with all sorts of credit history. In general, you must have a stable source of income and at least fair credit, though some lenders will offer higher-interest personal loans for those with low credit scores.

 

The lender will require you to fill out an application and provide proof of income and residency. They may have other requirements such as a checking account or automatic debits for your payments. 

 

When is a Personal Loan a Good Idea?

Personal loans serve a valuable purpose for the person who doesn’t have cash on hand. It can help you pay for unexpected expenses without taking away from your income which is needed for regular living expenses.

 

Sometimes, people will take a personal loan to finance a major planned expense, such as a wedding or vacation. This is a good idea if the interest rate on the loan is less than on a credit card.

 

Other people will take out a personal loan to help them establish a credit history. For example, you may have just graduated college and be living on your own for the first time. You could use your savings to buy a new TV or kitchen appliance, but you decide to take out a small personal loan to help you build credit. Paying off a personal loan will give you a positive history with credit so you can get more credit for a car or home in the future.

 

Know Your Limits

Getting a personal loan can be a smart move. Just make sure you know the interest rate so you can tell if you’re getting a good deal. Look for personal loans with lower interest rates so you can save money over using credit cards. Make sure you can afford the payments on your loan or even better – pay it off early.

 

A personal loan can be a good way to get the money you need for your situation. Just make sure you know you’re getting the right offer for your budget.