A personal loan is a form of credit which is usually borrowed for a small amount and a relatively small period of time without any collateral or security. It generally comes with a lower interest rate than credit cards, and the rate and repayment schedule is fixed. You will have to repay the loan in installments every month until your debt is completely repaid.

Here are three situations when its best to use a personal loan and how it can prove to be your savior:

Debt Consolidation

There may be times when you suddenly have to make a lot of payments due to multiple debts. For example, you have purchased a new home, and you want to invest in various electronic appliances too. You can choose to use your credit card and make multiple payments or decide to opt for a personal loan, which will clear all your payments at once. And then, you only have to make the loan repayments every month.

The bigger advantage here is that instead of paying different credit card bills at a higher interest rate, the personal loan will consolidate all your payments, and you will have a lower, fixed interest rate.

Medical Emergency

When there is a sudden or unexpected medical emergency, and you have to make a considerable payment, medical providers may offer you the flexibility of making payments in monthly installments. However, these payments can turn out to be expensive, owing to the high rate of interest. So instead, opt for a personal loan that will help you pay your medical fees upfront and then repay the loan at a lower and affordable rate of interest.

A Major Purchase or Expense

Suppose you have to make a significant purchase like a vehicle or do some unavoidable critical repairs to your home or your vehicle. In that case, a personal loan might help you get a finance cushioning. However, be sure that the purchase is absolutely necessary. Else, choose to save up and buy instead of opting for a loan.

Quick tips: What you may need to qualify for a Personal Loan

• A good credit score: A good credit score will ensure that you get good interest rates and repayment options. A poor credit score will offer you higher interest rates, or it may even disqualify you for a loan.
• Low debt-to-income ratio: This ratio is calculated by dividing your monthly recurring debt amount with your monthly income. If the ratio is higher, lenders may be hesitant to offer you a personal loan / ask for collateral/charge higher interest rates.
• Cosigner or Collateral: Generally, personal loans do not need any collateral. But if you have a low credit score, lenders may ask for collateral or a cosigner with good credit.

Author Bio – 

Lily Tran is a content writer, working for MoneyTap, who writes about all things Finance. Her passion for credit, debt, loan & investment drives her to help readers get an insight about everyday finance.