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Last Updated on April 11, 2019 by Work In My Pajamas
Approximately 83.5 million Americans have taken out personal loans recently. Are you considering joining them and applying for one yourself?
Have you received mixed messages regarding personal loans? Maybe some people have tried to convince you that they’re a good option, while others have told you that you should never, ever take one out.
Have you been wondering, “are personal loans bad?” Are you unsure of where you stand on the matter?
If you’re not sure how you feel about personal loans, read on for some information that might help you make a decision.
In This Post:
Are Personal Loans Bad?
The answer to this question isn’t exactly a simple one. Generally speaking, though, personal loans aren’t bad.
For some people, a personal loan can be a great tool to take control of their finances. For others, a personal loan just adds to their debt and makes it harder for them to achieve true financial freedom.
Personal Loan Pros and Cons
There are both benefits and drawbacks to personal loans. Some of the greatest benefits of personal loans include:
- They offer higher borrowing limits than credit cards
- They often have lower interest rates than credit cards
- There’s no need for collateral (in most cases)
- They come with a predictable repayment schedule
- They come with longer repayment terms than some credit cards and loans
There are drawbacks to personal loans, too, though.
If you already have a lot of debt, taking out a personal loan can make it harder for you to pay off those debts. It could also have a negative impact on your credit score if you don’t use your loan in the right way.
Sometimes, taking out a personal loan makes sense. Other times, though, it’s best to look for other ways to make money, such as selling items on Amazon.
When Should You Use a Personal Loan?
Personal loans are not inherently good or bad. It’s all about how you use them. Speaking of using personal loans, when it is ideal to get one?
The following are seven situations when it makes sense to use a personal loan to make ends meet:
1. Consolidating Debt
If you have a lot of debt spread out across several different credit cards, you can use a personal loan to pay off those debts. Then, you just have one payment to make each month instead of several.
When you use a personal loan to consolidate your credit card debt, you might also get a lower interest rate.
2. Financing Large Purchases
If you have a one-time, large purchase that you need to make, a personal loan can provide you with the funds you need to do that.
The key, though, is to make sure you will have the money in the near future to pay that loan off. Otherwise, you’ll just end up with more debt and a decreased credit score.
3. Improving Your Credit Score
A poorly used personal loan could have a negative effect on your credit score. If you use your personal loan correctly, though, you can actually raise your credit score.
When you make your payments on time and don’t add to your debt while you’re trying to pay off the loan, you’ll likely find that your credit score goes up.
4. Funding Unexpected Expenses
Sometimes, bad things happen and we don’t have the money to pay for them.
Even if you do have an emergency fund set up, there’s no guarantee that all the money in that fund will be able to cover a serious unexpected expense like a broken down car or a medical emergency.
In these situations, it makes sense to take out a personal loan to make sure you can meet your unexpected financial obligations.
5. Adoption
Adopting a child is incredibly expensive. It can easily set you back tens of thousands of dollars. If you’re desperate to expand your family but don’t have the money you need set aside for adoption, a personal loan is a good option to consider.
6. Making Tax Payments
If you’re self-employed or own your own business, you’re responsible for making quarterly tax payments to the IRS.
If you have a payment due but don’t have enough money set aside for it, a personal loan will allow you to send your payment in on time and avoid a tax penalty.
7. Starting or Expanding a Business
Ideally, you would use a small business loan to start or expand a business. These loans can be hard to qualify for, though, especially if you’re a young entrepreneur who’s starting their first business. If this applies to you, a personal loan might be a good alternative to consider.
Applying for Personal Loans
The process of applying for personal loans is pretty straightforward. You simply contact your lender and fill out a loan application.
If you’re not sure which lender you want to use, it’s a good idea to read online reviews and compare rates to find a lender that will give you a personal loan with the lowest possible interest rate.
Before you apply for a personal loan, be sure to check your credit score and correct any errors on your report. This will give your score a boost and increase your chances of approval.
Make sure you have information regarding your employment, monthly income, and other expenses (such as rent or car payments) ready to go as well.
Learn More About Personal Finance Today
As you can see, there’s not exactly a simple answer to the question “are personal loans bad?” As with most things, they have benefits for some people and drawbacks for others.
If you’ve been considering applying for a personal loan, be sure to keep this information in mind so you can make the best decision for yourself and your personal finances.
Do you want to try to earn money on your own instead of taking out a personal loan? Would you like to earn extra money so you can pay your personal loan off faster?
Either way, there are lots of helpful articles on our site. Check out this one on side hustle ideas to get started.
