If you’re short on cash, but facing a huge expense, a personal loan may look like a tempting solution. You’re not alone: more than 34% of Americans have taken out personal loans in the past year.
But be warned: personal loans are not always a good idea. It’s important to assess the reason you’re seeking a personal loan to make sure it won’t make your financial situation even more stressful.
3 Times You Should Take Out a Personal Loan
Lenders like banks and other financial institutions offer unsecured personal loans to qualified borrowers. Since unsecured loans aren’t backed by collateral, credit score plays a major role in the approval process. Applicants with poor credit scores must often deal with high-interest rates to secure their loans.
With that said, there are three good reasons to saddle yourself with monthly personal loan payments over the next few years.
Debt consolidation is one of the most popular reasons that Americans take out personal loans. This means pulling existing debts from vehicles, credit cards, and other sources into a single loan with a single payment each month. If the interest rate on your new personal loan is lower than the rates on your existing debt, you can even save money using this strategy.
Starting a Business
Every business needs seed money. But if you can’t tap into your own bank account to launch your new business, a personal loan may provide the help you need. Business lenders are rarely willing to work with new companies that can’t provide tax returns and months of bank statements, so it’s easier to qualify for a personal loan to fund your startup.
Using this method allows you to gain essential business capital and repay it slowly with fixed monthly payments over the span of a few years. That gives your business plenty of time to grow!
Your mortgage isn’t the only cost of homeownership. Home improvements also become necessary from time to time. Taking out a personal loan may be a good way to cover the costs of your renovations and pay them back month-by-month.
Many homeowners prefer to use personal loans instead of a home equity line of credit (HELOC) since personal loans don’t require borrowers to have equity in their home or to use their home as collateral.
3 Times You Shouldn’t Take Out a Personal Loan
In other situations, taking out a personal loan could spell financial doom for your bank account and credit score.
Vacations are relaxing, enjoyable, and memorable. But they’re also unnecessary and if you need a personal loan to cover the costs, unaffordable as well. Experts warn against using personal loans to fund vacations, trips, and other large expenses that aren’t critical.
The reason is simple: when you borrow money for something unnecessary, you’re punishing your future self with years of high monthly payments. If you couldn’t afford a $3,000 vacation without a loan, you’ll probably find it just as difficult to afford the monthly payments of $300 required to pay off your personal loan.
To Pay for College
College is becoming increasingly harder to afford, but using a personal loan isn’t the best way to cover tuition and room and board. Personal loans assign relatively high-interest rates and require repayment to begin within 30 days of the loan’s origination. This means you’ll be forced to make payments on your loan while you’re still in college.
The federal government offers a better option for student loans through FAFSA. Depending on your income level and other financial details, you may even qualify for grants and scholarships through your school!
To Cover Basic Expenses
Using a personal loan to cover basic expenses, like rent, utilities, and groceries may solve your problem in the short-term. But it’s a one-time Band-Aid solution that doesn’t fix your root issue: your expenses amount to more than your income. Plus, after using a personal loan to tackle your most important bills, you’ll simply have yet another bill added to your list. This creates even more financial strain rather than helping to resolve it.
The Best Way to Get a Personal Loan
If you need a personal loan but you’re not sure where to look, start here. OppLoans and Credible both make it easier to obtain personal loans, even for people rejected by traditional banks and financial institutions.
Opploans provides online personal loans. It promises fast funding, affordable payments, and “the money you need… when you need it.” Loans are available up to $3,000. They’re a popular choice for people with low credit scores because it offers loan approval without a credit inquiry and provides funding as soon as the next business day. If you’ve been denied by other, more traditional channels, OppLoans may give you the financing you need.
Credible is a popular source for comparing rates with instant and accurate results. It’s completely free for users. You only need to fill out one form to view all lenders and loan options available.