If a paycheck isn’t enough, a personal loan is just a few days away. Of course, loans come at a cost, and not every expense can or should be covered by a loan. However, we all know that situations change, emergencies arise, and some expenses can’t wait all that long.
A personal loan isn’t an alternative to waiting longer for another paycheck. But the right mindset and math can make a loan the bridge between paychecks, ensuring you don’t drown in the water.
Let’s look into when a regular salary can and should be supplemented by personal loans.
When a Personal Loan Makes Sense
Personal loans often make sense. But there are a few cases when they are wiser than at other times.
1. Emergency Expenses
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A popularly cited statistic is that 40% of Americans don’t have $400 in cash saved for an emergency. The Federal Reserve puts the figure at 63% in 2023. Different surveys put the figure closer to 40%.
In any case, looking at statistics from the US and most other developed economies, not having emergency savings is a normal situation. That’s a big part of why emergency expenses are one of the most prudent reasons to take loans. You have to pay these expenses no matter what, and a loan can make a big emergency affordable by stretching out payments over time.
You can take an emergency loan after covering expenses on a credit card. By taking a personal loan, you can pay off your credit card immediately, save your credit score, get a much lower interest rate, and pay over months instead of all at once when your credit card payment is due.
2. Debt Consolidation
Credit card debt comes with very high interest, and repayments are expected monthly. Anything not paid in full can cost as much as 20%, or often more. However, most people still use credit cards as the go-to for day-to-day expenses they can’t afford. This has led to a situation where 64% of credit card debtors avoid other financial decisions.
Debt consolidation loans offer a quick solution that is meant to reduce your overall costs while also allowing you to make manageable repayments. For example, you take a single debt consolidation loan in Norway or Sweden and pay off your credit card debts at once. This can quickly improve your credit and your ability to handle the debts.
Debt consolidation is a wise reason to take a personal loan. Making credit card debts more manageable is a generally prudent financial decision.
3. Planned One-off Costs
The expenses you plan for the most carefully are the ones that make personal loans make sense. Even expenses like a vacation or a wedding often justify personal loans. Not every purpose for taking a personal loan needs to be an absolute necessity. But whenever you can plan ahead and do the calculations, a personal loan can make an expensive one-off cost more affordable.
Many one-off costs are seen by lenders as valid and even typical reasons to take a loan:
- Weddings
- Home renovations
- Major purchases
With a personal loan, you can spread a major expense into a series of smaller, more manageable payments.
4. Building Credit
Sometimes, people make calculated decisions to improve their credit score. There are even “credit-builder loans” and similar products offered by some lenders.
If you don't have a well-established and strong credit score, it can be hard to qualify for some loans. Sometimes, you can qualify, but your interest rate and terms won't be as favorable. This is where a personal loan comes in.
Your credit score is made up in part by the diversity of credit you use and repay responsibly. If, for example, you’ve only ever used one credit card, your score can be high due to good behavior. But if you take a personal loan and use multiple forms of credit, it can be higher.
Lenders' decisions are almost entirely impersonal and are increasingly automated. So, it often pays to use every option to increase your borrower credentials. You won't always need optimal credit, of course. But when you apply for a mortgage, a large car loan, or a large loan for an emergency, you'll be happy for every bit of bargaining power you have.
How to Get a Personal Loan
You can get a personal loan from a bank, credit union, or other lender. To actually apply, you simply need to go to the website of whatever lender you work with and fill out an application. Or you can walk into your bank and ask to speak with a representative to discuss a loan.
It's quite easy to start a conversation or application with a lender. The hard part is getting the best deal you can. This is where lending platforms can be helpful. For example, you can get pre-approved for a Danish or Swedish consumer loan in 24 hours. The platform will automatically process the information and go through all the loan products for which you can qualify. Then, you can compare the options available to you, seeing which loans offer you better terms.
