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If you’ve ever filled out an application for a loan or another financial product, you may have come across a question asking you for the intended use. Responding to this question can be scary because you don’t want to risk approval – especially in dire situations. Although honesty really is the best policy when it comes to loan applications, lying could land you in a worse financial situation. To learn more about personal loans, how to answer the intended use question and common uses for personal loans, continue reading below.
What Is A Personal Loan?
A personal loan is an unsecured form of financing which means that collateral is not required. A personal loan term tends to be short to medium in length with varying interest rates. The extended interest rate depends on the lender and the borrower’s financial situation. Once a borrower is approved for a loan, they start making installment payments that consist of both interest and principal amounts.
What Is The Best Reason To Give When Applying For A Personal Loan?
The best reason to give when applying for a personal loan is the truth. In the end, it won’t benefit you or the lender to lie so transparency and honesty are ideal. Lenders may seem intimidating on the outside, but in most cases they want you to achieve your financial goals with their help. If you lie, it will be challenging for lenders to help you achieve your goals because they won’t have an accurate picture to work off of.
Common Reasons Why People Take Out Personal Loans
Personal loans aren’t restricted to a specific purpose the way a mortgage or a car loan is. For this reason, there are essentially infinite potential uses for a personal loan. However, there are some common themes for personal loan use, let’s take a look at what they are below.
- Loan Consolidation or Debt Repayment. If you’re carrying a lot of credit card debt or other high-interest debt, you can use a personal loan to repay it, this is often called debt consolidation. The motive for this is to secure a lower interest rate and to become debt-free.
- Unexpected, Emergency Expenses. Sometimes life comes at you fast – and with a price tag. If you have a medical emergency, an urgent home repair, or another unexpected expense that can’t wait, using a personal loan to cover the cost is a good solution.
- Home Renovation. Using a personal loan to finance a home renovation is a great option. An alternative to using a personal loan is a home equity line of credit (HELOC). However, the risk of losing your home is much less with a personal loan.
- Car Repair. Every now and then cars break down and it can be costly to repair. To cover the cost, you can use a personal loan.
When Is It A Bad Idea To Take Out A Personal Loan?
Now that we’ve had the opportunity to look at common and reasonable uses for personal loans, it’s time to consider events where using a personal loan is a bad idea. In some instances, using a personal loan could cause you more financial struggle, as listed below.
- Education Or Career Development. Because there are dedicated student loans for this purpose, using a personal loan isn’t the greatest solution. Student loans tend to have lower interest rates and favourable repayment terms so using one is in your best interest.
- Financing A Car Purchase. Car loans typically have lower interest rates than personal loans meaning that a car loan is more ideal.
- Paying For Vacation. Using a personal loan for a once in a lifetime opportunity is one thing, but using a personal loan to finance an annual vacation is not a great idea. It’s best to set aside some money for vacations to preserve your financial situation.
- When You Can’t Afford The Payments. While a personal loan can be a useful tool to help cover the cost of an emergency or unexpected expense, it’s important that you can afford to keep up with the payments. Taking on a loan that will only put your finances under more strain is never a good idea.
Applying For A Personal Loan Can Affect Your Credit
The initial effect on your credit when you apply for a personal loan is a hard inquiry. A hard inquiry indicates that a potential lender has pulled your credit report to assess your creditworthiness. This inquiry will cause your credit score to dip slightly but will replenish after several months, given that everything else stays relatively the same with your finances.
The long-term effects of taking out a personal loan surround loan payments. If you make full, timely payments, your credit score will improve. On the other hand, if you frequently miss payments or make partial payments, your credit score will suffer. Failing to repay your debt as agreed upon with the lender is the most common cause for credit score decline – make sure to manage your debt responsibly.
Is A Personal Loan Right For Me?
Whether or not a personal loan is right for you depends on your unique financial situation. It’s ideal to use savings that you have before taking on a loan, but this isn’t always an option. If you need to use a personal loan, ensure that you can afford the payments and won’t be worsening your financial situation. If you decide that a personal loan is right for you, Loans Canada can help find you the option based on your needs.
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