According to studies recently done in the United States, the top reason why people take out a personal loan is to consolidate their debt. Now that is a move that makes sense. Debt consolidation means that you combine your debts, such as car loans, credit cards and payday loans, into a single loan with a fixed rate, fixed monthly payment and fixed term.
For some people, the consolidated payment ends up being less than what they were paying while servicing several different loans. Others benefit from the fact that they can stretch their repayments over a longer time and pay a lower monthly instalment. Debt consolidation is usually a good idea; just make sure that your debt doesn’t end up being very expensive because you are paying it off over a longer period.
Debt consolidation is of course not the only reason why people take out personal loans. Here are 8 more:
- Pay off credit cards. The advantages can include a lower rate, which can reduce the total amount of interest paid, and a finite term, which can set an end date to the payments.
- Renovate, improve or extend your house. A personal loan is a great option if you don’t have money on your home loan, or if you don’t want to use your home loan as a credit vehicle.
- Get married. Many couples are choosing a personal loan to cover their wedding expenses. This gives them cash in hand with which to negotiate the best deals with venues and suppliers. They also have the flexibility to go for either an all-inclusive package or to choose individual contractors.
- Move house. A major long-distance move can be expensive enough to warrant a personal loan. It makes particularly good sense if you move to take up a new job with a higher salary that will allow you to repay the loan quickly and easily.
- Bury a loved one. Funerals can be extremely costly and if the deceased person had not made the necessary provision, a personal loan is a good option for the family to consider.
- Cover medical expenses. From emergency care after an accident to elective procedures such as straightening a few crooked teeth, a personal loan can help you to deal with a health predicament.
- Buy an asset. Although most people usually choose a secured loan to buy assets, such as a car, it might not be an option for you. For example, when your credit history is not long enough to generate a credit score, you can use a personal loan to buy the wheels you need.
- Take a dream vacation. What to do when you want to go on that once-in-a-lifetime trip but don’t have quite enough money? Consider a personal loan. It wouldn’t be smart to borrow money every time you want to go away for the weekend, but your honeymoon, for instance, is a different matter.
Some borrowing reasons are better than others. The bottom line is that you should never borrow money when it is not necessary and when you cannot afford it. If you want something rather than need it, the reason is probably not good enough.