There are a couple of types of loans you can get from nearly any lender. One of them is a secured loan. This is a loan where the amount of the loan is guaranteed by something of value, like a car or your home. If you default on the loan, the lender can sell your property to fulfill your debt obligation.
An unsecured loan, on the other hand, is one that you guarantee simply by your name and your credit score. It is essentially a promise to pay back some money you have borrowed. Because there is nothing to secure the loan, this type of loan often has a higher interest rate and is harder to qualify for. However, there are many instances when you might want to take out an unsecured loan vs. a secured one.
Here are five ways you might best use an unsecured loan.
To Start a Business
Often when you are starting a business you may have expenses you cannot cover with the money you have in the bank. The business itself may have few or even no assets to start out, and you may not want to take the risk of using your own personal assets to secure business funding.
This is one instance where taking out a personal loan may be desirable. While it is better to borrow in the business name to try and build business credit as well, it will be easier to get one in your name using your established credit history. Often business loans will rely on your credit score anyway.
Be careful to outline what you will use the loan for, and don’t borrow more than you personally can afford to repay, even if you believe the business will repay the loan in the long run anyway.
To Cover Emergency Expenses
Sometimes emergencies come up, like the need for last minute travel, family crisis, car repairs, hospital bills, or other emergencies not covered by insurance that you need to pay. A simple way to take care of these purchases and then pay them back over time is to take out a personal loan.
The only issue with this is that sometimes it takes a while for a personal loan to be funded because your bank or lender needs proof of income, a credit check, and other documentation. A word of caution is that there are predatory lenders out there who will issue short term loans at high interest rates. Beware of these lenders, as the cost of these loans can be quite high. Payday loans, title loans, and other short term loans all fall into these categories.
To Make a Large Purchase
Let’s say you want to change the appliances in your kitchen, update your computer, or redecorate a room in your home. You may not have the cash to do so, and it really is not a reason to dip into your emergency savings fund.
A personal loan can be the answer, especially if you can get a good rate from your bank or credit union. You can borrow just what you need to complete the project and pay it back at your leisure. Just remember that interest rate is accruing, so paying things off sooner rather than later is the best policy.
To Take a Vacation
A personal loan is not always the best choice for funding a vacation, but if you have some money saved and need some more funds to close the gap so that you can afford that dream vacation, a personal loan can help you do that.
There is a word of caution here. Paying off the loan sooner rather than later means your vacation costs less. The cost of the vacation will actually be not only what you spend, but the cost of the loan from origination and document fees to the annual percentage rate compounded. Be sure you understand how your loan works and what it will actually cost.
To Build Your Credit
One of the best reasons to take out a personal loan is to build your credit or improve your credit score. Revolving lines of credit like lines of credit and credit cards are one way to do this, but an unsecured personal loan says a lot about your financial responsibility. Since you do not have anything at stake like secured property, paying the loan shows that you are true to your word and will pay back what you have borrowed.
This also increases the kind and amount of credit you have available. The amount you are eligible to borrow will go up as your income grows and you pay off other loans and debts. A personal loan can be a great way to boost your credit score provided you use it properly, pay it back on time, and never default on a personal loan.
Unsecured loans are a common way of borrowing money, and there are many ways you can use them. These are simply five of the most common ways you can use and unsecured loan, and how that will work for you.
