Learn the Basics and Benefits: Personal Loans 101

Bennett Queen
Greater Nevada Credit Union
When you were a child, did you ask your parents for ten dollars because you wanted to buy something that you couldn’t afford? Did they reply, “Okay, but you’re going to have to pay me back, plus interest.” If they did, they were teaching you a valuable lesson about borrowing. There are many types of loans. There are loans used to purchase a home (mortgage), loans used to purchase a car (auto loan), and even loans used to finance your way through college (student loans).  Unlike these, personal loans aren’t used for specific purposes. If you’re unfamiliar with what a personal loan can be used for, or if you’d like a refresher course, read on to find out more!
 

What is a personal loan?

To better understand a personal loan we have to first be familiar with the term “unsecured loan”. “Unsecured” simply means that a financial institution won’t require collateral in return for granting a loan. With an auto loan, the financial institution holds the title to your vehicle as collateral until the vehicle is paid off. This is not the case with a personal loan.

What are personal loans used for?  

Personal loans can be used for a large number of things but some of the more common uses include:

Debt consolidation

One of the more popular uses for a personal loan is to consolidate debt. According to StudentLoanHero.com credit card debt per American household is on average $6,662. Most Americans have this spread over multiple credit cards with varying amounts of interest. Obtaining a personal loan can be a great way to pay off credit cards because you may be approved for a lower interest rate, depending on your credit score. Plus, adding another type of loan to your credit portfolio may have a positive effect on your credit score as long your payments are on time.

One-time expenses

Personal loans are often used to finance one time purchases such as home improvements or repairs. According to homeadvisor.com the average kitchen remodel costs $21,626. That’s no chump change, and if you don’t have that amount saved you can choose to wait, or you can look into a getting a loan. A personal loan may be a sensible option because it will also be an investment in your home. An updated kitchen is a great feature if you ever decide to sell your home.

Emergency expenses

Have you ever heard of Murphy ’s Law? Murphy ’s Law states: anything that can go wrong will go wrong. Unforeseen emergency expenses can hit at any time, and if your savings account is looking a little low, a personal loan can help you out of a sticky situation.  For example, let’s say that your car stops running a week before payday; you just spent your last chunk of change on groceries. What are you going to do? Using a personal loan to pay for unplanned expenses can be a stop gap until you have the money that you need. No one can plan for emergencies so you should try to put a little bit of cash away for a rainy day, but if you need a little extra emergency help, consider getting a personal loan.

Summer vacation

It’s not a good idea to spend money that you don’t have. Using a personal loan to finance a family vacation if you are already heavily in debt is not the best idea. But, if your debt is manageable and you’re thinking about taking a vacation and charging everything to a credit card, think about getting a personal loan instead. There are advantages to a using a personal loan and avoiding a credit card, like lower interest rates, fixed payments, a fixed term, and a spending cap. Charging a vacation to a credit card could mean that you are paying it off far into the future. You don’t want to go on a tropical vacation then pay interest on it five winters down the road. With a personal loan you have a fixed interest rate and can’t overspend. It can be a responsible way to have a fun, family vacation!

A personal loan can be a great resource when used sensibly. You may be asking yourself now, how much can you get for a personal loan? Or, how can you get approved for a personal loan? If you’re ready to learn more, simply visit gncu.org where you can submit an online question or contact a loan consultant personally at (855) LIV-GR8R. Working with a trusted lender is very important and at Greater Nevada, you can count on us to help you Live Greater.
 
07/17/17