Personal loans are often a good way to borrow. You can use the loaned money for anything you want, and the loans come with a fixed repayment schedule, so you’ll know the borrowing costs up front as well as the repayment date. The interest rate is also usually much lower than what you would pay with a credit card (unless you qualify for a special promotional rate).
But that doesn’t mean it’s always a good idea to get a personal loan. In fact, there are many circumstances in which it does not make sense to incur this type of debt. Here are three of the worst reasons to take out a personal loan.
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1. Because you don’t control your spending
If you’re trying to live well beyond your means, a personal loan can, in theory, provide you with the cash to do so.
But you’re going to dig yourself into a deep hole that might be hard to get out of unless or until you’ve mastered budgeting. You will also be making all your purchases more expensive by paying interest, which means that you will have to further reduce your standard of living in the future to live within your means, as some of your money goes to your creditors.
If you tend to overspend, borrowing is not the right tactic for your situation. Instead, you should budget and start living with it.
2. Because you are making a big purchase that you really can’t afford
If you need to borrow to buy something you can’t pay off all at once, a personal loan may be a better way to do it than a credit card. It offers the predictability of knowing your total borrowing costs, and you’ll likely pay a lower interest rate.
But the key word is must. If the purchase isn’t really essential, but is just something you want, borrowing for it is often a bad idea – interest charges will increase the cost. And your efforts to get a “desire” by going into debt could interfere with important financial goals.
The best way to buy big ticket items you want is to save for them over time so you can pay cash and not have to pay a creditor for months or years.
3. Because you don’t want to make a debt repayment plan
One of the best reasons to take out a personal loan is to consolidate or refinance your debt. When you get a loan at a lower interest rate than your current debt, you make repayment cheaper. And when you can combine multiple debts into one new personal loan, you also simplify repayment.
But getting a personal loan to pay off other debt isn’t a real debt-free plan – it just moves the debt to a new place. Make sure you can pay off the personal loan, understand the full cost of the loan, and make a commitment not to go deeper into the hole once you’ve paid off your credit cards with a personal loan.
Make sure a personal loan is the responsible choice
Before taking out a personal loan, consider whether the loan is helping or hurting your financial situation in the long run. If you’re borrowing out of necessity or to consolidate other debt as part of a solid repayment plan, you are probably making a good choice. If not, give some serious thought to whether this decision is right for you or if it is a decision that you will eventually regret.