By the end of 2018, total consumer debt hit a whopping $4 trillion. Studies are showing that Americans collectively owe 26% of their income to debt. Moreover, they spend 10% of their monthly income on non-mortgage debts, such as credit card bills or various loans (student, auto, or personal loan).
More surprisingly, even though their disposable income is increasing, people are still borrowing a considerable amount of money.
Just so that we’re on the same page, consumer debt is a personal one, not something owed by a business. It typically encompasses household expenses or transactions. The debt usually involves money lent by a financial institution, such as a bank or credit union.
What’s the Reason Behind the Increasing Consumer Debt?
One of the first things that come to mind is inflation. Nerd Wallet states that the reason why Americans are facing a tough time managing their budgets is that the cost of living consistently outpaces income growth. In the past 13 years, household income levels grew by 28%, yet the cost of living rose by 30%.
However, a recent study alarmingly pointed out that a significant percentage of Americans are not financially literate. They lack fundamental knowledge about investment and finance. This may well be the reason behind a steadily growing consumer debt.
What Are Your Choices?
When faced with insufficient funds to make the necessary payments, there are a few options. Depending upon what you need the money for, you can take out a loan. With a mortgage, you can get financial assistance for buying a house. And if you feel that your current mortgage is too much for you to handle, consulting Re-mortgage Advisors can be an option for the homeowner to go for and see if they can help bring down the current payment amount they are on. Similarly, you can get an auto loan for a car or a student loan if you need help paying for tuition fees.
Another Solution for You
But another kind of loan – a personal loan- is available for just about anything. The freedom to use the money in any way you want makes it a favorite among many. But another reason why many prefer this type of loan is that they’re usually unsecured, meaning there is no collateral involved. On the other hand, a mortgage keeps your home as collateral, and an auto loan holds the car you’re buying.
A personal loan can be obtained from a bank, credit union, private lending companies, peer-to-peer lenders, etc. However, another option is gaining a great deal of traction- online loans, as well as others around the country, are finding it an easy and fast way to acquire personal loans.
There are two types of personal loans. An unsecured personal loan may have a higher interest rate than a secured one, which is available at a lower cost.
When is Getting a Personal Loan a Smart Move?
There are circumstances when obtaining a personal loan is a good idea. Many people acquire them for all sorts of reasons, from financing a move to fixing up your set of wheels.
Just because other people are opting for this route does not mean you should blindly follow. A loan equates to regular debt repayments. So it’s better to ask yourself if this will be worth it at the end.
- Will it be for business reasons? If so, will you be able to make more money than you are borrowing?
- Is this for an urgent expense that has to be paid immediately?
- Will you be able to save money by consolidating the debt?
Remember, the lender sets the amount and the repayment terms of the loan. You’ll have access to funds with a fixed payoff date. There are a few factors that the lender will look into:
- Credit score- a higher score improves your chances of acquiring a loan while also translating to a lower interest rate.
- Income- a steady paycheck backs your ability to make regular monthly installments.
- Monthly obligations- do you have other loans (e.g., auto or mortgage) or regular payments (e.g., rent) that you are currently making
What Are the Reasons for a Personal Loan?
Personal loans can be useful, especially if you can’t afford to pay cash. But before you borrow money, make sure to consider all your options first.
Once you feel confident about your decision, here are a few instances where taking out a personal loan is the right thing to do:
Cover Unexpected Expenses
What do you do if you don’t have adequate funds to cover the cost of unforeseen incidents, such as a medical emergency or a sudden death in the family? On top of everything else, you need money right away. Unfortunately, medical procedures and funerals are expensive.
For those who do not have enough cash saved up, putting the bill on a credit card could wrack up the costs pretty quickly. A personal loan offers an ideal solution, mainly because it can be acquired for a lower interest rate. Moreover, most lenders have a fast application process and make funds available quickly.
You now have access to cash when and if an emergency strikes. You can receive treatment without delay or cover the costs of a burial in a dignified manner.
Consolidate Credit Cards
If you have multiple credit cards that are maxed out, you could get a personal loan to consolidate all the charges into one monthly payment. This is because getting a personal loan can be less costly. The interest rate on loan is typically lower than the APR (annual percentage rate) on credit cards.
Additionally, with a credit card debt, paying the minimum amount can take years to pay off. But with a personal loan, you can set a schedule according to your financial condition. And since these loans usually have a three- to the five-year repayment plan, you can manage your debt at your own pace.
Paying off all existing debts that have a higher interest rate, and dealing with just a single low-interest monthly payment makes life less complicated.
Make Home Improvements
Whether your home faced natural disasters or it’s time for some much-needed renovations, repairing a house is costly. You could consider taking out a home equity loan or home equity line of credit and avail lower interest rates. But then you would have to borrow against your home.
Instead of putting your house at risk, an unsecured personal loan may be the more sensible thing to do. That way, you could also extend the remodeling plan and upgrade various aspects of your property. Homeowners go this route if they are considering multiple projects, such as landscaping, kitchen or bathroom upgrades, or installing solar panels. Furthermore, a loan could help finance a purchase, such as kitchen appliances.
A Family Event
There are various uses of personal loans, but many seem minute as compared to planning a wedding or a vacation. These cherished moments hold significant value for everyone.
There’s no point in compromising on the essentials. Taking out a personal loan can help ease cash flow when you need it the most. As long as you can prove to the lender that you are in a financially stable position to repay the loan, getting a little push up for these occasions is a way to enjoy them without constantly having to keep your budget in check.
On a side note, it’s best to borrow the least amount possible. You don’t want to come back from your vacation or start your married life with a mountain of debt.
Most personal loan providers will decide on how much they are willing to offer, depending upon your financial health. Ultimately, you are the one who needs to determine how much you should borrow. Borrowing an amount that you can conveniently repay is the smart choice.