There are probably a lot of ways you can think of to spend a few thousand dollars. Some would go for the flat screen, others would settle for just a run-of-the-mill shopping spree and many would take the traditional road and go on a lavish vacation. But when you take out an unsecured personal loan, you should have a plan of action to ensure your borrowing success.
The truth is an unsecured loan isn’t a free wad of cash. It’s a line of credit with interest and a repayment date. So if you’ve decided to commit to a personal loan, make sure you’re doing it for the right reasons.
Debt Consolidation
Though it sounds counterproductive, some borrowers take out an unsecured loan to pay off varying wayward debts. With consumer debt totaling $11.4 trillion, it could seem irresponsible to reach for another loan, but many have found that it can propel them into paying off debt for good.
Though an unsecured loan will likely have a higher interest rate than a mortgage or home equity loan, odds are that it will have a lower APR than your credit cards. With a loan worth $1,000 to $5,000, consumers find it simpler and more effective to have one loan to worry about rather than three or more credit cards with varying balances.
The Perk:
A repayment deadline often forces borrowers to rid themselves of debt much quicker than they would have. If you’re frequently missing payments due to disorganization or find yourself making only the minimum payments, an unsecured loan could set you free.
The Downside:
In some cases, a personal loan can be set up like a revolving line of credit. In this case, you’re no better off with the loan than you were with the credit card. Don’t tack on more debt if you’re already struggling to manage what you have.
Weddings
If you were blessed with an impetuous son or daughter, an engagement can roll into a wedding before you have time to financially prepare. Whether you’re a parent of the groom or the bride, every family wants to pitch in to make their child’s wedding perfect.
If savings are bleak and the floral centerpieces of her dreams are expensive, borrowing may be the only way to make that special day perfect. Budget with your child and shop around to ensure you’re not over-borrowing.
The Perk:
For a day that comes only once in a lifetime, it can be worth taking out a small loan to make sure it goes off without a hitch.
The Downside:
You’ll likely be spending months paying off something that lasted for only a few hours. Be mentally prepared for a bill that lasts longer than the wedding cake.
Home Improvements
Fixing up your home can always feel like a “One day…” topic. One day you’ll get a pool, one day you’ll fix that rough, one day you’ll have the granite countertops of your dreams. It can seem so distant and often gets buried under a mountain of other obligations.
An unsecured loan can be the permission you’ve needed to start making your house better. These types of tasks can not only improve your enjoyment at home, they can also help increase the value and the attractiveness of your home in the buyer’s market.
The Perk:
A loan reserved for a major home project can add comfort to your home that is both aesthetically and financially beneficial.
The Downside:
Often home improvement is put off because it isn’t necessary when measured against other needs. If your loan goes towards improving the look of your home, you could end up sacrificing more essential needs.
Business
Though a traditional brick-and-mortar business could present tens of thousands of dollars in startup costs, today’s online business owners often don’t require as much. To get a website up and running can be a matter of a few thousand or even a few hundred dollars.
Go as far as you can to get your business off the ground by yourself. When you can’t go any further, consider an unsecured loan for getting you to the end of the finish line.
The Perk:
A loan for this type of an expense can be considered an investment if the small personal loan can contribute to future earnings.
The Downside:
Any kind of business takes time before it starts generating revenue. Make sure you’re not depending on the business’ income in order to repay your loan.
Frivolous Shopping
While there are a number of ways you can use an unsecured loan that are beneficial in the long run, there is one major way that can spiral borrowers deeper into debt. Frivolous spending is dangerous no matter what type of credit you put it on.
Going to the mall or the electronic store or even just dining out on a loan is ill-advised. You may get some short term satisfaction out of it, but you will struggle in the long run. If you couldn’t afford those odds and ends to begin with and you have the choice to live without them, spare yourself the struggle of repaying an unsecured loan.
Any type of loan or credit card requires know-how and discipline. With a plan in mind, you could successfully pay for what you want or need and keep the risk of borrowing down.
Tags: APR, Debt Consolidation, unsecured personal loan