Gen Z citizens, you’ve probably come across personal loans and their usefulness. Everyone in the generation seems to have loans and finances as a prominent topic of conversation, whether it’s on your TikTok feed, in a chat with your uncle, or even in a mainstream news article. Loosing a personal loan can seem appealing, but like anything, can have some downfalls depending on the financial sense used when deciding on the to get one. This article goes over personal loans, their risks, and how to get approved for one.
What Is a Personal Loan
Personal loans are one of the countless lending options today. Personal loans like home or car loans are clasified as uncollateralized loans, meaning they aren’t secured against a borrower’s property. These loans can be used for a bunch of different purposes, like schooling, debt consolidation, weddings, or even emergencies. The loan is to be paid back in set amounts that include interest over a specific time, which could be anywhere from a few months to even several years.
Drew is part of Gen Z and is considering the possibility of taking out a personal loan to make a large purchase, and he is considering the possibility of doing so responsibly and in a way that is beneficial to him in the long run financially. Here is a discussion of some of the things Gen Z should consider before taking out a personal loan to ensure that they are doing so responsibly and in a way that financially benefits them.
how Gen Z can responsibly take out a personal loan.
1. Educational and Skills Training.
Education training and furthering one’s skills is a great reason to take out personal loans. However, one must consider the increasing costs of higher education and the specialized education training programs. Leducating yourself is a great way to advance your career as it is an investment in your future. A personal loan should only be taken to complete specialized training programs that are geared to help advance your career to a higher paying position.
Scenario example: Gen Z takes out a personal loan in order to take a meaningful course that teaches skills in an area such as data analytics, therefore enabling them to attain jobs that are of higher pay scales.
2. Consolidation of Debt
This helps one financially by simplifying one’s finances. Taking out a personal loan to pay off one’s multiple credit cards and other smaller loans is themselves so one can reduce the interest and the overall costs. Multiple loans are themselves high costs, by taking one personal loan, one can reduce the number of loans themselves.
- (Consolidating student loan debt or credit card balances into one personal loan with a better interest rate can save money in the long term.)*
*Starting a Small Business or Side Hustle*
- Using personal loans to fund small Startups or small businesses has been a trend among Gen Z. A personal loan to fund a business venture should be worth the risk if it is a good business idea or creative side hustle.
- This can be seen in example of a young individual who loans money to begin a small online ecommerce business or a freelance service company to enable them to buy the needed capital for the service business or to obtain a functional business website.*
*Medical Emergencies*
*Unexpected medical expenses can be a lot, especially if you are not prepared for it. A loan allows you to take care of medical emergencies and not worry about having to pay it immediately.*
- For instance, Gen Z having to take out a loan due to a medical emergency where the costs of the needed surgery are high.
Home Renovation or Large Purchases
Personal loans are also used by young adults to improve their homes or to buy high-cost furniture and appliances. Personal loans can cover the cost if your living space is aging and needs upgrades, or if you’ve been saving for a large purchase.
Example: Using a personal loan to finance a home renovation project or buy a new laptop for work or school.
Picture of a Young Individual
Description: Young Individual focused on computer display while sitting on a desk looking at a document concerning the loan application on the desk and the computer showing loan conditions. Personal loans involve a lot of responsibilities.
Risks of Personal Loans for Gen Z
In spite of the benefits concerning the loans, personal loans do come with certain risks. Consider these before acquiring a personal loan:
- High-Interest Rates
Unsecured personal loans generally have higher interest rates than other loans with collateral. If the loaned amount is not repaid, the debt can accrue exorbitant interest. Gen Z borrowers with little to no credit history certainly need to prioritize understanding interest.
- Risk of Over-Borrowing
Perhaps the most significant risk of a personal loan is the possibility of over-borrowing. Debt accumulation ramps cycle after borrowing excessive money. The revolving debt cycle becomes extremely challenging to overcome.
- Effects on Credit Score
Not paying off your loans can lead to a bunch of problems. For one, it can lead to a negative impact on your credit score, which can wind up affecting your financial situation and your ability to get loans or credit cards for a long time, especially since your credit report/equation isn’t really going to change and is going to have a bad score for a long time.
- Short Repayment Periods
Many loans require you to pay them back in a short time frame. This means that you have the potential to have fairly high payments each month. This is good in that it helps you pay off the loan fairly quickly, but can definitely hurt you financially if you don’t anticipate being able to pay higher payments each month.
Getting Approved for a Personal Loan
Lenders will look at many different factors when trying to give you a loan. Before applying for a personal loan, here are a few, but not all factors to keep in mind when trying to make your chances for approval go up.
- Looking at your credit score before applying for a personal loan is best.
Your credit score is one the biggest factors to look at when applying for personal loan in the first place. Getting your credit score relatively high will give you better chances for approval and also give you lower rates once approved. If your score is at a place you are not comfortable with, try to fix it before applying for the loan.
2. Have Consistent Employment
Lenders prefer to see you’ve been employed somewhere consistently for 1.5 years or more registered. As long as you have constant work in the position without jumping around regularly, it makes you a better risk. Be sure to include proof of work, such as employee pay history, or print out earnings from paypal or venmo in the case of freelancing.
3. Know Your Debt to Credit Ratio
The debt to income ratio is the percentage of earnings spent on the debt obligations you currently have. A sad fact is that due to the policies in place, the higher the DTI ratio the less likely you are to get a loan. A general ‘good’ DTI ratio should be less than 35%.
4. Pick Appropriate Loans
When picking a personal loan to apply for, make sure to be sure to take one that fits intricately with the set of needs you have on hand, as well as being fit with the set of finances you have as well. Look for loans that have, on top of a large balance, manageable rates of interest, periods of repayment that are reasonable, and are with fewer strings attached than others. Make sure to take your time and compare the rates as well as policies from each loan or lender.
5. Preparing to Provide the Required Info
Take your time, be ready to present any information that the lenders are requesting, like evidence showing your identity, where you live, how much you make, and any other debts that are around. If you have patience, the posing of such documents is where the application of the lenders is concerned. It allows for a much smoother process to occur, and possibly allows you to get a loan far more easily than you imagined.
Conclusion: Personal Loans — A Tool for Empowerment
Obtaining personal loans empowers Gen Z to achieve several goals, including financing a business, managing unplanned costs, and furthering education. Personal loans, when used responsibly, develop financial self-sufficiency and create new possibilities. Bear in mind, however, that there are some risks to consider, such as high-interest loans, overborrowing, and adverse consequences to your credit score.
Taking responsible financial actions that consider personal loans as a means to long-term achievement is possible when you know how to use personal loans, and the benefits that come from them, appropriately. If assuming a personal loan is in your best interest, it is crucial that you only borrow the amount needed, as well as establish and adhere to a repayment plan. By doing this, personal loans can pave the way for a better financial future.
