Before taking out a personal loan, ask yourself this question
This is a very important question.
- A personal loan can be a flexible and affordable way to borrow.
- But it’s important to make sure you’re borrowing funds for a good reason.
- Ask yourself if you are borrowing to obtain a want or a need.
There is a reason why consumers are generally drawn to personal loans when the desire or need to borrow money arises. Personal loans are flexible in that they allow you to borrow money for any purpose (whereas when you take out a mortgage or car loan, for example, you must use the funds for home or car purchase purposes, respectively).
Also, personal loans tend to close quickly. It is possible to apply for a personal loan and have your money in hand within a week.
Personal loans also tend to offer competitive interest rates. You will generally pay less interest on a personal loan than on a carried over credit card balance. And while credit card interest tends to be variable, with a personal loan you can lock in a fixed interest rate on the amount you borrow. The result? Predictable ongoing payments that make it easier for you to fit into your budget.
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But while it’s easy to see why personal loans appeal to so many people, the reality is that it’s important to get one under the right circumstances. And so there is one key question you will need to ask yourself before going ahead with applying for a personal loan.
Am I borrowing for something I need or just want?
Because personal loans allow you to use your proceeds for any purpose, you can take out a personal loan and use it to make a major repair to your home or repair your car. And both are a good reason to take out a loan.
But taking out a personal loan to go on vacation or upgrade your electronic devices is another story. And you might want to think twice before applying for a loan to finance these types of purchases.
Although personal loans tend to come with competitive interest rates, you are still borrowing money. And you pay extra for the things you buy because you pay interest, even if it’s not an exorbitant amount.
It’s one thing to take out a personal loan to meet a need, like fixing your car or replacing essential appliances that no longer work. But it’s another thing to take out a personal loan to be able to afford a luxury trip. The latter is something you’re usually better off saving up for – while you can’t always put off a home or car repair.
All debt has consequences
Every time you borrow money, you commit to a series of debt repayments that will monopolize a portion of your income. And if you fall behind on the debts you take on, you risk damaging your credit score.
That’s why you’ll need to be careful when taking out a personal loan and make sure you’re borrowing money for a good reason. You might like to take a trip or buy new things for your apartment. But the stress of having to repay a personal loan could deprive you of this advantage and cause you financial difficulties. So if you’re not borrowing money to meet a need, but rather a want, you might want to seriously reconsider.
The Ascent’s Best Personal Loans for 2022
Our team of independent experts have pored over the fine print to find the select personal loans that offer competitive rates and low fees. Start by reviewing The Ascent’s best personal loans for 2022.