When you can use quick cash to help pay for upgrading your home or a number of other things, personal loans can be a great option for those that don’t have the money on hand.
When it comes to personal loans, these are unsecured loans, meaning there are no collateral requirements. As such, they aren’t inexpensive, but do provide you with a viable option for situations where borrowing in Canada without collateral is needed.
Common Ways People Use Personal Loans
Since a personal loan is unsecured, you are usually able to use it for just about any option you might choose to. There are all kinds of options which best describes a way Canadians can use personal loans, with the following being a few of the more common ones.
Debt consolidation – For some with a good credit score, consolidating their debt with a lower interest rate can help them to save. This is especially popular for those that might be a few credit cards and owe on each. With a good credit score, it’s likely you can get a better interest rate than the average 18% that credit card companies charge. This can save you hundreds, possibly thousands, and make it more manageable to have one balance to deal with.
Home improvement – When you don’t have the funds in your savings, a personal loan for remodelling or upgrades around the home can be the next best option. Not only can this help improve the value of your home, it can help to maintain it as well. Using personal loans for home improvement or renovations can make it more energy efficient, improve the comfort, or help with things such as a much needed roof repair or similar.
Financing large purchases – When you have a large purchase to make, such as appliances or a new furnace, using a credit card isn’t always a great option. While you might get points or similar, if you can’t pay off the card immediately, that’s a high balance with a high interest rate. Using a personal loans for such purchases can make things more affordable over the long term.
Another way to make use of personal loans is to help improve your credit score. This is especially true if your credit history contains signs of missed payments on past debts. Also, if your credit history mainly shows credit card debt, adding a personal loan can help with your credit mix, another factor that can help earn a good credit score.
Other Ways People Use Personal Loans
When thinking of applying for a personal loan, you aren’t limited to the reasons provided so far, and can use the loan for all kinds of things. Some will make use of the cash for things like emergencies or unexpected expenses, while others might use it for things like weddings, travel, moving, education, legal fees, vet bills, funerals, starting a business, or repairs.
This only begins to cover some of the possibilities in ways people use personal loans, and many more of them are not recommended.
Best Ways to Use Personal Loans
Limiting your use of personal loans to situations where they might help your personal finances is usually sound advice. From consolidating debt to possible home renovations, which is further investment in what might be your largest asset. Sometimes there are expenses that come up which might not be luxuries or essential to helping your finances, such as repairs or urgent medical care, but necessary just the same. Times like these are when small personal loans may make more sense than other financing options or using a credit card.
There can be good and bad reasons for using personal loans, and remembering that after you get the money you’ll have to start paying back is important. Another way of looking at this is good debt versus bad debt. Good debt would be the type that has the potential to offer future returns, like renovating your home or investing in yourself through education or training so you might improve your financial situation with a better job down the road. Bad debt might be summarized as any debt you’re unable to repay. It also provides no future returns on your investment and becomes burdensome.
Bad Ways People Use Personal Loans
Since a personal loan can be used for just about anything, sometimes people make choices that would not be advised on how to use the funds. A few of these reasons might include music festivals, season tickets, vacations, jewelry, or a home down payment.
There are also a number of ways to use a personal loan that lenders won’t allow, such as gambling or illegal activities. Most lenders ask for the purpose behind the loan request and how you intend to use the money to ensure that you do not use it for prohibited reasons.
Some people can get into financial trouble with personal loans by trying to use them to finance a lifestyle they can’t afford. While it’s wise to use personal loans for pay off debt, it’s a bad idea to use them for unnecessary or frivolous purchases that may drive you deeper into debt. Loans for a want rather than a need is another way to look at whether the timing is right.
Where to Start with Personal Loans
By taking the necessary steps to pre-qualify for a loan, you can see what the potential rates might be without impacting your credit score. But the place to start is knowing what your credit score might be so you are aware of what rate you might be eligible for, or whether you qualify at all. This also helps you determine what amount you might be able to afford.
You should also ask yourself the following questions to see if persona loans are right for you;
- Do I have a good reason for getting a personal loan
- Can I handle more debt at this time?
- Will I be able to make the payments?
When it comes to borrowing, it’s not just about how much you might like to have, but what you are able to afford. It’s worth noting that while you can extend the term for lower monthly payments, this does increase the overall amount of interest that will need to be repaid.
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