You’d be hard pressed to find someone who can move through life without coming up against a financial need from time to time. In fact, it’s probably not a huge stretch to say that a lot of people could do with a few extra dollars in their bank account. Why? Well for many, having a little extra money put aside can provide some comfort in knowing that if you end up facing unplanned expenses, essential repairs, or any sort of financial emergency, you’ll have some savings to help you out.
But when you’re living on a tight budget and don’t have much (if any) extra money to work with, even a small unplanned expense can throw your financial situation into disarray. If you run into this scenario, a short-term personal loan might be what you need to get you through it. The problem is, if you don’t know much about these financial products, it might not be completely clear as to when you should or shouldn’t be using them.
Why is this distinction so important? Personal loans online (or in person) can be a helpful and convenient option to get money when you need it, but if these funds are misused, there can be some pretty dire consequences. Borrowing money doesn’t always come cheap, and all personal loans aren’t created equal. They have different fees, different interest rates, and different uses, so it’s important to understand when you should be using a particular type of personal loan over another.
So, with that in mind, let’s look at what personal loans are in the first place, and then take a look at a few different scenarios that could warrant their use.
What is a Personal Loan?
In general terms, a personal loan is money lent to you by a financial institution that you can then use for personal uses. This is a fairly broad definition, but as long as you’re not applying for this money for any sort of business purpose, you can generally consider it a personal loan.
As we mentioned earlier, there are different types of personal loans out there that are intended to be used for different purposes. These can include:
- Auto loans: Designed to provide you with funding to purchase a car.
- Mortgages: Designed to help you purchase a house or condo.
- Student Loans: Intended to help students pay for their post-secondary education.
Depending on your needs, you may need a long- or short-term personal loan, and you may be able to apply for them online or in person.
Closed-End Vs. Open-End Personal Loans
When we’re talking about personal loans, an important distinction to make is whether they’re closed-ended or open-ended. With a closed-end personal loan, you’ll be given a lump sum of cash which you’ll need to pay back, along with interest and/or fees, within a specific time frame. Some common examples of this type of loan would include payday loans and installment loans.
An open-ended loan on the other hand, works differently. With these types of personal loans, which includes things like credit cards and lines of credit, you’ll be given a credit limit which you can draw funds from on a revolving basis, if approved. You can do this as long as you have available credit and your account is in good standing. As you pay back what you’ve borrowed along with interest and/or fees, you’ll then be able to draw against your limit again.
How Can I Use a Personal Loan?
Whenever you’re considering applying for personal loans online or in person, you need to not only understand what they are, but also when they’re meant to be used. Like we said, with a lot of personal loans, you’ll be able to choose what to do with the money you get, so it’s even more important to understand when to use them. There are plenty of uses for personal loans, but the ones we’ve listed may be some of the more common ones. Let’s take a look.
1. Dealing with Emergency Expenses
In general, helping you to handle emergencies may be one of the main functions of a personal loan. Especially when you don’t have an emergency fund or any other savings set aside to help you deal with the financial fallout of an emergency. This could be any general emergency that comes up unexpectedly.
While you may be able to find a loan online or in person, if time is of the essence, you might want to consider applying for personal loans online. The potentially fast personal loans that you may be able to find online generally have a speedier application process than what you might find at a storefront lender, and you can sometimes start these applications 24/7. With a storefront, you’ll be at the mercy of their business hours which may be a tricky thing to navigate depending on your schedule.
Just remember that if you’re in the market for an emergency personal loan, you might end up having to deal with particularly high fees and/or interest rates, so just make sure you only apply for them as a last resort and for emergencies only.
2. Emergency Home Repairs
When we talk about emergency home repairs, we’re not talking about redoing your back deck or giving your bathroom a facelift. In this case, we’re specifically referring to any sort of urgent and essential home repair that can’t be put off. This could be something like a broken window, getting black mold removed, or fixing a broken furnace. If you run into an emergency repair like this and can’t cover it with your savings, an emergency personal loan may be an option.
3. Emergency Medical and Dental Care
Potential medical expenses may not be at the top of your list of things to worry about. After all, maybe you’re young and/or have had a particularly clean bill of health up until this point of your life. But a healthy medical history won’t protect if you run into an accident and have a hard time paying for a trip to the emergency room. Without insurance, a surprise trip like that can cost you a pretty penny.
Because of this, you should make sure to either take advantage of your workplace benefits, or make sure you make room in your budget for health insurance regardless of whether or not you’ve had a clear medical history.
If you do run into an emergency medical expense and need some help dealing with the cost, a personal loan could be an option. Just make sure that you exhaust all your options to potentially lower the cost of your medical expenses. This means looking for financial aid programs, seeing if there are any payment options available to you, and even negotiating a lower price.
4. Emergency Car Repairs
If your car is central to your ability to get to work, drive your family around, and generally navigate through life, you may have already factored in expected maintenance costs into your budget. But that extra planning may not account for potential emergencies.
As much as you may not want to keep ignoring the check engine light that flashes across your dashboard every time you turn on your car, sometimes life gets in the way. Between driving your kids to school, going to work, and taking care of the million little errands you need to run around town, it can be hard to find time to take your car in to handle unexpected problems, especially when they don’t seem like immediate needs. But the longer you put it off, the bigger chance there is that this seemingly innocuous warning turns into a bigger (and more expensive) problem.
So, if you run into an emergency auto repair that your savings won’t cover, you may consider applying for a personal loan. While it’s not possible to completely eliminate the chance of something going wrong with your car, try to stay on top of your regular maintenance to help reduce the risk of something spontaneously breaking down in the future.
When Should I Not Use a Personal Loan?
This might already be clear from the examples we’ve given above, but personal loans aren’t tools to help you treat yourself. As jealous as you might be when you’re scrolling through social media and see your friend’s new 65-inch TV, this doesn’t give you permission to take a loan out to buy one for yourself. As tempting as it may be to splurge, these loans can get expensive and shouldn’t be abused. They’re meant to help you handle emergency expenses and should only ever be considered as a last resort, and only when you can actually afford to pay one back.
Be Smart About Your Use of Personal Loans
A personal loan can be a useful financial tool to help you out in sticky situations, but the key is to make sure you’re only using them when appropriate. If you’re facing emergency expenses, dealing with pricey home repairs, or facing surprise medical expenses, they can help you close the financial gap. But they can also lead to some pretty negative consequences if you’re not careful. If misused, you may end up in a cycle of debt that can be tricky to find your way out of.
Be sure to do your research, understand what your options are, and only use them as a last resort. Any big or small financial decision requires a lot of planning, so make sure you take the right steps!
