The Purpose of Personal Loan (Forbrukslån) and Reasons to Get One

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The customary purposes for personal loans include covering emergency expenses, consolidating debts, and financing large purchases. These debentures, which are usually unsecured, are paid in monthly installments with additional interest rates. 

Most financial institutions and credit unions will look at the person’s creditworthiness, as well as other factors to help them determine the borrower’s interest rate. Individuals should always evaluate the purpose of the debenture to find out whether they need to borrow and have the capability to make regular payments.

What is the purpose of a debenture? 

Listed below are some reasons why people apply for personal loans (PLs).

Consolidate debts to pay bills

Consolidating debts is a big reason to borrow personal debentures. This approach can make a lot of sense if the person is able to secure a debenture with a low-interest rate. If the borrower pays their other debts with the funds from personal loans, they will only have one fixed-rate monthly payment, and they might save some money on interest. 

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The average Annual Percentage Rate on a two-year personal debenture is 9.46% – the latest information from the Federal Reserve – while the average IR (Interest Rate) on credit card accounts is more or less 14%. These debentures for debt consolidation could also help people:

  • Extend their repayment terms
  • Lower their monthly payments
  • Free up more of their income to cover important expenses

Cover any unplanned emergency expenses

While it is best to create an emergency fund to help cover unexpected expenses, emergency personal debentures can help if the borrower is not prepared. According to a 2019 study on emergency savings, only 48% of people in the country could handle a thousand-dollar emergency cost using their savings fund. Some reasons for emergency loans include:

  • Automotive repairs and maintenance
  • Loss of job or reduced working hours
  • Help for a family member or friend
  • Medical cost

Make the needed home repair

While people might have wish lists of home improvements, they might only consider personal debentures for emergency problems impacting their safety and health. Individuals might have problems that need immediate attention like:

  • Gas leak
  • Blocked pipelines
  • Broken air conditioning or heating system

In these cases, this type of credit can help people pay for the maintenance and repairs in the long run.

Finance a funeral expense

When someone dies and they have not left behind enough money to pay for the funeral, it can put a tremendous financial strain on surviving family members. Median costs for a funeral with a viewing and burial were $7,000 to $8,000. A lot of people will not have enough money saved to cover these costs all at once. Funeral credits could be a good idea if people are struggling to cover the funeral cost. They may even be able to get funeral debentures with a bad line of credit.

Help cover the moving cost

Another reason for this type of credit is to cover moving costs. There are a lot of scenarios in which moving debentures may make a lot of sense:

  • They do not feel safe in their current environment
  • They are separating from their spouse
  • They need more space for a kid on the way

Job offers in another place can be another reason to move, but people should consider carefully whether their new cost of living and income will make it possible to help them repay their loans. These debentures for bad credits are possible, but they usually come with a higher interest rate. Individuals will want to calculate whether their new income will cover additional moving expenses.

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Misconceptions that Consumers have about Loans - The World Financial Review

Make big purchases

People can take out PLs to finance big purchases, but that does not mean they should borrow funds to get new entertainment systems, cars, or patio sets. Some big purchases are needed, like suddenly needing major furniture or appliances. 

While individuals can use these debentures to purchase an automobile, auto credits are usually preferred since they have lower IRs and more straightforward qualification prerequisites. On the other hand, car loans need collateral. It means people could lose their vehicles if they fall behind on their payments. It is an excellent idea to compare IRs, especially if they are worried about risks.

Reasons why choose PLs over another kind of debt

People are looking for debentures that do not need collateral. One of the advantages of getting PLs is that they are unsecured. It means that they are not backed by assets like the borrower’s car or home. While secured loans usually come with lower IRs, some risks are involved.

If borrowers default on their secured debenture, they risk losing the collateral they used to back their credit.

If they fall behind their payments, they might face repossession of their car.

Since financial problems can strike anytime, anywhere, individuals might feel more secure with unsecured loans.

Take note that the cost of these debts is usually a lot higher since lending institutions have no fallback if they do not pay. Meanwhile, Annual Percentage Rates on car loans and home debentures are usually in the single digits. While getting PLs with lower rates is possible, the best offers are reserved for individuals with good credit scores. Borrowers with scores of at least 720 receive an average Annual Percentage Rate of 10.73%, compared to borrowers with scores below 639, which will only receive 37.09% of the Annual Percentage Rate.

People want a safer option to payday credits

If a person has a poor credit rating, they may need to consider borrowing payday credits to help cover a purchase. But payday debentures are problematic, even if it is easy to access funds between paychecks. Borrowers could be charged a higher Annual Percentage Ratings up to 400%. 

Additionally, more than 80% of payday credits are extended or rolled over into another credit within two weeks, according to the CFPB or the Consumer Financial Protection Bureau. Lower credit scores will not usually disqualify an individual for a PL, but they may have to take another look at their credit options. 

Some lenders will offer PLs for bad credits and will work with individuals despite their low scores. Doing some research will be worth the trouble since these things will almost always have lower fees and rates compared to payday credits, plus it has a longer repayment timeline.