Personal loans are versatile, giving you flexibility and freedom when it comes to covering emergencies, paying off expensive credit card debts and covering other large expenses. But personal loans involve borrowing money, which means you want to understand the process and make decisions wisely. After all, you want a personal loan to improve your financial situation – not make it worse.
The pros and cons of personal loans
Borrowing money can be expensive, especially if you’re dealing with high interest rates. Many would-be borrowers find personal loans to be a less expensive, more flexible option than credit cards when they need money in hand. There are many advantages to borrowing money through a personal loan.
Lower interest rates. Many personal loans have lower interest rates than credit cards, making borrowing money less expensive. But if your credit rating is less than optimal it isn’t always the case.
Installment loan. Personal loans are an installment loan, so you have a set number of payments to make before the loan is paid off again.
Improve credit score. Making regular payments on an installment loan, especially if you use the funds to pay off other debts, can improve your credit score.
Flexible spending. Personal loan proceeds can be spent on anything, making them a truly flexible way to borrow money. That’s not to say there aren’t a few other considerations for personal loans. Before you take out a personal loan consider what might be disadvantages of the loan.
A new monthly expense. Can your budget handle paying the minimum payment on your personal loan every month?
Needs versus wants. Since you can spend personal loan proceeds any way you want, are you borrowing money you need or simply taking on a new debt for something you want?
Get the most out of personal loans
You can use your personal loan for anything, which means you can finance a wild shopping spree if you choose to, but that’s probably not the best use of your money. Instead, consider that the best ways of using a personal loan are ways to take back control of your personal finances.
Debt consolidation. Personal loans are a great way to pay off expensive credit card debt through debt consolidation. The premise is simple. You take out a personal loan with a reasonable interest rate. You use the loan proceeds to pay off all your more expensive credit card debt. You now just pay off the personal loan and you’ll effectively be debt free.
Improve your monthly budget. A side benefit of debt consolidation through personal loans is that you may find your have a lower monthly payment each month. If your new personal loan payment is less than the combined minimum monthly payments of the credit cards you just paid off, you have lowered your bills and given you some financial wiggle room each month.
Improve your credit score. There are personal loans for every type of borrower. If your credit score has suffered a bit, personal loans can help you improve it simply by borrowing money and then paying it back again correctly. If you happen to use those funds to pay off credit cards or other debts, you could be doing even more to boost your credit score.
How to Apply for personal loans
You can apply for personal loans with your traditional bank or credit union, or you can apply through an online lender. Online lenders often provide faster approval with a less cumbersome application process since they have less overhead and are more nimble than traditional banks. Prepare to apply for online personal loans by organizing the right documents and understanding how the loan process works.
Gather necessary documents. When you apply for a personal loan, you’ll need to show evidence of your Canadian residency and your steady income. Find the documents you need beforehand to keep the application process simple.
Be sure you have bank account information. You can’t take out a personal loan without having a checking account. Find the account information, including routing number and account number, since this information will be required during the application.
Be ready to make the first payment in a few weeks. Repayment on a personal loan starts just a few weeks after borrowing. When you apply for the loan, you’ll be given terms to accept before the process is complete. Look closely at the monthly payment for the loan and be sure that you can handle that payment for the number of months required to pay the loan in full. That first payment will be due in a matter of weeks, so have a plan for how you’ll be repaying the loan accordingly.
Personal loans can help you out of a tight financial spot or give you the flexibility to rebuild your monthly budget according to your liking. Personal loans have a lot to offer, but like any other financial tool, it’s important to understand how they work. After all, you want to get the most out of every dollar you borrow.