Reasons for Personal Loans: Smart Uses and Key Tips Before You Borrow

Are you facing a big expense and wondering how to cover it? A personal loan might be the solution. Knowing when and why personal loans make sense is essential to borrowing wisely.

Whether you’re consolidating debt, handling an emergency, or funding a major milestone, this guide will walk you through smart reasons for personal loans, what to know before applying, and how to choose the right loan for your needs.

What Is a Personal Loan?

A personal loan is a lump sum of money borrowed from a financial institution, like your local credit union, that you repay in fixed monthly installments. Unlike mortgages or auto loans, personal loans can be used for almost anything, from home repairs to debt consolidation to medical bills. That flexibility makes them one of the most accessible forms of credit.

Top Reasons for Personal Loans

So, why do people take out personal loans? Here are the most common, and financially sound, reasons:

1. Debt Consolidation: This is one of the top reasons for personal loans. If you have multiple high-interest credit card balances, consolidating them into a single personal loan can simplify repayment and reduce your interest rate.
2. Credit Card Refinancing: A variation of debt consolidation, refinancing lets you pay off high-interest cards with a lower-interest personal loan. This can save money and help you pay off debt faster.
3. Home Repairs or Improvements: From emergency plumbing to planned upgrades, personal loans can help cover home-related costs without tapping into your home equity.
4. Medical Expenses: Whether planned or unexpected, medical bills can add up quickly. A personal loan offers fast funding to get care when you need it most.
5. Auto Repairs: Car trouble can derail your budget. A personal loan can help you get back on the road without relying on high-interest credit.
6. Weddings or Big Events: Although most experts advise caution with borrowing for non-essential expenses, some use personal loans to fund weddings or milestone events. Ultimately, be sure to weigh the long-term cost before using a loan for “wants” instead of needs.
   1. A LendingTree report from June 2023 showed that some people even get personal loans just to pay everyday bills. That can be troubling, but in a time of stubborn inflation and record debt, we shouldn’t be too surprised.

By far, the most common reasons why people take out personal loans are debt consolidation and credit card refinancing. Used wisely for those purposes, the right personal loan can save you significant money, slash your payoff time, and even reduce the amount of bills you have to pay each month. That’s a big deal, especially considering how tight people’s budgets are and how long people’s to-do lists can be.

What to Know Before Applying

If you’re considering a personal loan, here’s what you need to know:

• Credit Score Matters: Your interest rate and loan terms largely depend on your credit score. The higher your score, often, the better the offer.
• Fixed Interest Rates: Most personal loans have fixed interest rates, meaning your monthly payment won’t change. This offers predictability, especially compared to credit cards or variable-rate loans.
• Origination Fees: Some lenders charge a one-time fee (up to 8%) for processing your loan. Always factor this into your total cost.
• Loan Amounts Vary: Depending on the lender and your credit profile, you may qualify for a loan between $1,000 and $100,000.

Feeling stuck? Contact Sound Credit Union for support before applying.

How Long Are Personal Loans?

If you’re asking, “how long are personal loans?”, the answer depends on the lender and the loan amount. Most personal loans have repayment terms between 2 and 7 years.

Longer terms can reduce your monthly payment but increase the total interest you’ll pay. Shorter terms cost less in the long run but come with higher monthly payments. It’s important to strike a balance that fits your budget and long-term financial goals.

Here’s What to Consider When Choosing a Term:

Short Term Loans (2-3 years):

• Higher monthly payments
• Lower total interest paid
• Good for small loan amounts

Long-Term Loans (5-7 years or more):

• Lower monthly payments
• Higher total interest paid
• Better for larger expenses

Experts recommend striking a balance between affordability and long-term cost. Choose a monthly payment that fits comfortably within your budget while minimizing interest over time.

Unsure what to choose? Contact Sound Credit Union for support.

Applying for a Personal Loan: Step-by-Step:

Once you’ve decided to move forward, here’s what the application process typically looks like:

1. Evaluate Your Needs: Determine how much you actually need to borrow.
2. Check Your Credit: Review your credit report and score.
3. Shop Around: Compare offers from your credit union and online lenders.
4. Apply: Submit your application online or in person. You may need:
   1. Proof of income
   2. ID and Social Security Number
   3. Employment verification
5. Review the Offer: Look at the APR, term, monthly payment, and fees.
6. Accept and Fund: Once approved, funds are often deposited within 1–3 business days.

How Personal Loans Affect Your Credit

When used responsibly, personal loans can help build or improve your credit, but there are also risks to consider. Here’s what you need to know about how personal loans impact your credit score:

Positive Impacts:

• Improves Credit Mix: Credit scoring models tend to reward diversity. Adding a personal loan to your mix of credit types (credit cards, mortgage, etc.) can help your score improve.
• Builds Payment History: On-time monthly payments are one of the most important factors in your credit score. Successfully managing a personal loan shows lenders you’re reliable.
• Reduces Credit Card Use: Using a personal loan to pay off high-interest cards can lower your revolving credit usage, which also boosts your score.

Negative Impacts

• Missed Payments: Late or missed payments can damage your credit and remain on your report for up to seven years.
• Higher Debt Load: Taking on more debt increases your overall liabilities, which may hurt your score if not managed carefully.

Tip: Only borrow what you need, pay on time every month, and keep track of your balances to make your personal loan a positive credit-building tool.

Final Thoughts: Borrow With Purpose

There are many valid reasons for personal loans, but the key is to borrow with a clear purpose and a solid repayment plan. Make sure the loan fits into your financial strategy.

Remember: the best personal loan is one that offers the lowest total cost, meets your needs, and supports your long-term financial well-being.

Apply for a Personal Loan With Sound Credit Union

If you’re ready to take the next step, applying for a personal loan with Sound Credit Union is simple, fast, and secure. Whether you’re consolidating debt, covering an emergency, or planning a big purchase, our team is here to help you find the right loan for your needs, with competitive rates, flexible terms, and personalized service every step of the way. Visit your local branch or apply online today to get started.