Making a large purchase can be difficult to do if it leaves you struggling to afford the rest of your monthly expenses. Whether you’re trying to afford a holiday, buy a new car, finance a home improvement or pay for a wedding, it’s not always practical to pay up front, as this can lead to financial difficulty.
Instead, a personal loan can help you spread the cost of a significant purchase, allowing you to pay for it in a manageable way. This cuts out the time you might take having to save up the full amount and allows you to conveniently budget for repaying the loan on a monthly basis.
What is a personal loan?
A personal loan is usually supplied by a bank, private business or individual lender, usually to pay up front for a large purchase or to assist in paying off debt. The agreed amount of money is lent to you over a set amount of time, with a set interest rate that will indicate how much you will have to pay on top.
A personal loan can either be secured or unsecured. The difference being that a secured loan is linked to an asset you own such as your home or your car, whilst an unsecured loan is simply based on how credit worthy you are. This means if you fail to repay a secured loan, your asset could be at risk.
How can I spend my personal loan?
As long as the lender has agreed to fund the personal loan, you are welcome to spend it on whatever you need to. Commonly borrowers will use a personal loan to:
- Buy a new car
- Make a home improvement
- Book a holiday
- Pay for a wedding
- Consolidate existing debt
The lender might ask you what you plan to use the loan for, but this is simply to ensure they consider you to be credit worthy as a borrower, and you can repay the money on time and in full. It is completely up to you how you would like to spend the money, as long as you are confident you can afford to make repayments every month for the time agreed upon.
Is a personal loan right for me?
Getting a personal loan always depends on your financial circumstances and whether you can afford to make monthly repayments or not.
If your income allows you to have a bit of spare cash to spend every month, without affecting your ability to pay for things like your rent or mortgage payments, then getting a personal loan might be a good idea for you.
If, however, you are struggling to afford regular payments every month or have already got existing debt to repay, it might not be the right time for you to take out a personal loan. Taking out a loan if you know you can’t pay it back can lead you to spiralling into debt, damaging your credit rating and being denied access to financial products in the future.
Advantages of a personal loan
- Makes it easier to afford an expensive purchase
- Spread the cost over a period to suit you
- Can also help to improve your credit score
Disadvantages of a personal loan
- Some high interest rates can make it expensive to repay
- If you can only afford small repayments you could be repaying for a long time
- Missing payments can affect your credit score or accumulate penalty fees
- A bad credit rating might make you ineligible