People take out personal loans for a variety of reasons; some make more financial sense than others. Personal loans are popular and in certain cases are beneficial for banker and borrower alike, but it's important that borrowers don't get ahead of themselves when taking out money. Just because a bank will lend the money, doesn't mean you shouldn't first consider whether it's smart to take on more debt.
Debt consolidation loans
Debt consolidation is a popular reason to take out a personal loan, according to the websites Personal Loans and Loan. Borrowers expect that eliminating unsecured debt, via a traditional loan, will reduce the interest they currently pay on credit card debt.
The lower interest rate for consolidated loans makes paying back a sum of money (i.e. the amount of the loan) much easier because it portions the payments out over several months with a predetermined monthly payment.
Home improvement loans
Fixing up your house is another popular reason for taking out a personal loan. When borrowing money for home improvements -- which can range from building an outdoor garden, to remodelling the kitchen or repairing a leaky roof -- borrowers should consider taking out a home equity loan, before resorting to a personal loan.
In some cases, though, a home equity loan is not available to borrowers and they must resort to a personal loan. While the terms of a personal loan may prove less favourable than a home equity loan, the improvements may increase the home's value enough to mitigate the higher interest rate.
Loans for purchasing or repairing a vehicle
Though many experts frown on using a personal loan to purchase a vehicle, Personal Loans still recognises it as a top reason people give for borrowing money. While a traditional vehicle loan or car finance is widely regarded as more prudent, many borrowers find it easier to take out a personal loan and avoid the hassle of dealing with an car finance company. The borrower usually pays a higher interest rate for a personal loan than a vehicle loan or finance arrangement.
Along with buying a vehicle, repairing one is another common reason prospective borrowers cite when requesting a loan. Sometimes a personal loan may be the most expedient way to finance repairing it, but it's better to have an emergency fund from which to withdraw funds.
Loans for luxuries
Borrowing to finance big ticket buys like engagement rings, weddings and high-end electronics is also high on the list reasons people apply for personal loans, according to the websites Loans and Personal Loans. Ultimately these reasons must be evaluated by you, the borrower. If the purchase or activity is worth the interest that you'll pay for the loan, the website Rebuild speculates that there are plenty of banks willing to lend to you.