In a strange paradox, it seems that most people take out loans to pay off other loans. But experts caution that it might not be the best idea to consolidate your debts It might seem ideal to pay off all the loans in a single lump sum at first, since instead of paying 20 creditors, you need only pay one. The drawback is that while this serves as a way to “buy time”, it also means you will only put off your debts further.
A personal loan can be used for almost anything. It doesn’t need to be specifically defined or secured by a specific asset. Personal loans are usually made to fund general expenses. There are several types of personal loans – the most commonly known ones being secured and unsecured loans.
Secured loans typically have a lower interest rate, and may be specifically secured by a cash flow or asset. Unsecured loans have no specific claim on assets or cash flow. Instead, the lender would look at the creditworthiness of the borrower. Due to the higher risk, higher interest rates apply.
Most people take out loans to pay off debt, finance their businesses, repair their homes or for other general expenses.
Common reasons to take out personal loans are generally attributed as such:
- Peer-to-peer lending is on a rise as well. You’ll be surprised to know how many people spend beyond their means every year, becoming entrenched in debt. Personal bankruptcy is a pitfall that needs to be avoided at all costs. For some people, that answer is personal loans.
- To avoid that pothole, always aim to be debt-free. Before you take a personal loan, evaluate the need for it. Is it really essential? Loans may be enticing as a quick source of money, but you’re actually going to pay for it; sometimes even emotionally.
- Keep tabs on your assets.
These are the 3 key areas you need to monitor. By comparing what you have versus what you owe, you should be able to calculate your net worth. If you’re constantly in debt, your liabilities will be unhealthily large, and you will remain stagnant year on year. Keeping tabs on yourself will greatly encourage discipline and reduce the likelihood to take out loans.
Krasny, J. (2011). The Number One Reason People Take Out Personal Loans. Retrieved from: http://www.businessinsider.com/infographic-loans-lendio-2011-9