Today, for millions of Americans, times are tough. It’s understandable if you can’t pay the bills with the country in recession and COVID-19 remains a serious threat. But you’ll have to explore solutions to help you get through it.
One option is to get a personal loan. While this approach can work, it’s not necessarily the right option for everyone. Here’s what to consider to help decide if this is the best approach for you.
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Can you claim a personal loan?
If you’re thinking about borrowing to cover your bills, the first big question is whether you can qualify.
Lenders usually check your credit score and income sources when deciding if you can borrow, how much you can borrow, and at what rate to borrow. If you’re struggling to make ends meet due to a lack of income, you might not be approved for a loan.
While there are options, such as secured loans backed by collateral or obtaining a co-signer, these will not be available to everyone. So, before you count on an influx of money from a personal loan lender, shop around to see if you qualify and to compare rates and terms.
What are your alternatives?
A personal loan can be an affordable way to borrow, and if you take out a fixed rate loan, it offers predictability. You will know when your payments are due, how much they will be, the total cost of the loan, and how long it will take to get rid of your debt.
But there are other options. If you can afford to pay for your needs without a personal loan, this is the best alternative, because you don’t increase the cost of all your purchases by borrowing – with interest – to cover them. Cutting your budget and looking at the side activities you can safely do during the coronavirus pandemic could make this possible.
Borrowing from friends or family may also be a better option, as you don’t need to get approval from a lender. But this is not possible for everyone, and some people do not want to apply for a loan from their loved ones.
A 0% introductory APR credit card can be a good alternative if you can pay off your balance before the 0% introductory rate expires. You won’t have to pay any additional interest charges with this approach.
You can also borrow at a lower rate by getting a home equity loan or refinancing with cash, especially as mortgage rates are near their all-time low. But this approach comes with serious risks, because you could lose your home if you are not able to repay the loan as promised.
If you need to borrow, don’t want to worry about the possibility of high interest rates when a 0% credit card rate expires, and you don’t want to put your home in jeopardy , then a personal loan is often your best option.
Have you thought about the pros and cons?
Before taking out a personal loan to pay the bills, think about the pros and cons. Some of the advantages are as follows:
- Personal loans are often unsecured, which means you are not putting any collateral at risk.
- Personal loans often have a lower interest rate than credit cards (unless you can qualify for a 0% APR card and pay off your balance before interest starts accruing).
- Personal loans provide predictability because you will know the cost of borrowing up front, as well as when you are finished paying off your loan.
However, here are the drawbacks:
- You will need to know in advance how much to borrow, unlike a credit card, which allows you to charge for purchases as needed.
- You need proof of income and reasonably good credit to get approved for a loan at a good rate.
- Borrowing is paying interest, which makes your purchases more expensive.
If you’ve weighed the pros and cons, explored your other options, and decided that a personal loan is the right way to pay the bills, borrow as little as possible to lower repayment costs. And avoid borrowing if you can’t afford the monthly payments, as late payments could hurt your credit rating.