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Many of us don’t have piles of extra cash sitting around. In fact, surveys show that more than half of Americans have less than $1,000 in their piggy banks.
So, when the need arises, a lot of us lack the money to cover a big expense. In this sort of situation, taking out a personal loan might be a good option. A personal loan lets you borrow money for any purpose without offering collateral in return, such as a home or car.
But before you apply for a personal loan, consider why you’re borrowing the money, says Bruce McClary, vice president of communications at the National Foundation for Credit Counseling.
“No matter how affordable the loan seems, it’s wise to treat a loan the same as you would an investment. Think about the initial cost of the loan and compare it with what you hope to accomplish as a result of borrowing,” McClary says.
If you’ve given that some thought, then it’s time to shop around for your personal loan.
Here are five reasons for taking out a personal loan:
1. Consolidate credit card debt.
Joe Toms, president of Freedom Financial Network’s Freedom Financial Asset Management business, says one of the most popular reasons for getting a personal loan is to consolidate and pay off credit card debt. In many cases, a personal loan will carry a lower annual percentage rate (APR) than a credit card does.
Besides offering a disciplined way to pay off debt, a personal loan used to consolidate credit card debt can yield significant savings in terms of the amount of interest you’re paying, Toms says.
For example, if you repaid $10,000 over 60 months at a 20% APR on your credit card, you would pay $265 per month, Toms says. The interest you pay would total $5,894. If you could lower the interest rate to 16% with a personal loan, you would pay $243 a month over the same 60-month period and save more than $1,300 in interest.
When weighing a personal loan to pay off credit card debt, be sure you to do the math. This is a key factor in deciding whether to obtain a personal loan to pay off credit card debt or to stick with paying off your credit cards the traditional way.
2. Make some improvements.
Does your house need some TLC? For instance, maybe your kitchen needs a facelift, your roof has to be fixed, or your front door and garage door are overdue for replacement. A personal loan can cover these costs. One big benefit of these projects is that they can increase the value of your home.
» MORE: Home Improvement Loans
3. Pick up medical expenses.
A report released in 2016 by the Kaiser Family Foundation showed that about one-fourth of American adults are struggling with medical debt or someone in their household is. That burden easily can add up to thousands of dollars and can lead to financial disaster — medical debt consistently ranks as the No. 1 cause of personal bankruptcies in the U.S.
Whether it’s a planned procedure or emergency surgery, a personal loan can help you recover from the financial pain of medical bills. Before looking into a personal loan, be sure that making the monthly payments won’t do more harm than good.
4. Getting married.
It costs a lot to walk down the aisle.
A study by The Knot, an online destination providing information and advice about weddings, found that the average U.S. wedding cost $33,391 in 2017. Kristin Maxwell Cooper, editor in chief of The Knot, says the 2017 study indicates that couples are “pulling out all the stops to create a truly memorable experience for their wedding attendees.”
But pulling out all the stops requires pulling a stash of cash out of the bank. Yet what if there’s not enough money in your accounts to pull off the big day? A personal loan could help you go from “I don’t know how to pay for this” to “I do.”
» MORE: Wedding Loans
5. Taking a trip.
Maybe you and your family are dreaming of a Disney World getaway. Or perhaps you and your soon-to-be bride or groom are planning a honeymoon in Tahiti.
Regardless of the reason, your vacation likely won’t come cheap. A trip for a family of four can easily require $5,000 or more. And, sadly, most Americans aren’t able to escape debt to go on their great escapes.
A personal loan can help ensure that your vacation memories are fond ones, not financial ones.