If you are in need of some money for one thing or another, personal loans can be a helpful solution to your problem. They often have fair interest rates and terms that allow them to be paid off over months or even years. These loans can really help people out in a pinch, and millions of people around the world rely on them for a variety of different reasons.
However, a personal loan is not the right choice for every purchase. While it can be a great financial tool in some cases, it is not the best choice in others. With that in mind, here are some of the best and worst times to take out a personal loan.
Best Times To Take Out a Personal Loan
To Consolidate Debt
Debt is something that nearly every American adult has to deal with. In fact, the average American has more than $90,000 in debt. This debt (especially credit card debt) can have sky-high interest rates that add a lot of money to how much you owe. A great use of a personal loan is to use it to pay off all of your high-interest debts. You will still have the same amount of debt, but at a much lower rate. This will save you money over time.
To Pay for Emergencies
While it is good to be prepared in life, emergencies and surprises can always happen. If they do and you need money quickly, a personal loan can be a lifesaver. They can help pay for medical bills, keep you afloat after losing your job, or help pay for emergency travel or other situations that may arise. These situations can’t be planned for, and loans are a service that can assist when the need arises.
Making a Large, Important Purchase
Loans are also commonly taken out to make important and large purchases. This could be a car to get to work or school, a home, or to fix/replace an essential part of your home, such as your furnace, fridge, washing machine or other appliance. Not many people have thousands of dollars saved to make these types of big purchases in cash, and a personal loan can help you quickly deal with the issue before it becomes a bigger one.
Worst Times To Take Out a Personal Loan
To Pay for Wants
While essential needs and important purchases are great uses for a loan, the same can’t be said for things you simply want. If there is something fun you are thinking of buying but you can’t afford it, you should save up the money to pay for it in cash instead of getting a loan.
Things like a fancy vacation, a new TV, designer clothing or new jewelry generally aren’t things you should take out a loan for. In the end, that item will end up costing a lot more due to the interest that could accrue over months or even years. Many people do this, but it is not the best use of the funds from a personal loan. Also, using loans for wants can develop a bad habit that can lead to major issues with debt in the future if you don’t keep it under control.
To Keep Up With Expenses
The average American household spends more than $5,000 a month, which is quite high compared to many people’s monthly income. With this kind of spending, losing a job can be catastrophic. If you need to cover your expenses for a little after losing a job, a loan is fine.
But if you consistently use personal loans to stay afloat from month to month, there is a bigger issue happening in your financial situation. Instead, find ways to lower your expenses instead of finding ways to get more cash. This can include cutting subscriptions, shopping more intelligently and downsizing your home or car. It’s not always easy, but it needs to be done.
Ensuring You Borrow Intelligently
While borrowing money with a personal loan can be an incredible tool, you need to use this option carefully. Consider these situations the next time you are thinking of taking out a personal loan and make sure your motivation lines up with your bigger financial goals.