By Ryan Levin on November 10, 2011
.jpg.aspx?width=75&height=75) People take out personal loans for all kinds of reasons. Banks and other lenders often advertise them as an all-purpose source of money: you can take an expensive vacation, buy a car or appliance, pay for a wedding or another special event, pay emergency medical or repair bills; the list goes on and on. And it’s true that lenders don’t usually ask why you want a personal loan. The application process is generally fast and easy, and it’s rare for people to get turned down. Some lenders don’t even check your credit—anyone with a bank account is eligible to take out a loan of $500, $1000, or more.
Personal loans have some major downsides, though. Interest rates are usually high, even for people with reasonable credit. If your credit is low, or if the loan doesn’t require a credit check, then the huge interest rates will make the loan extremely expensive. What’s more, personal loans can be dangerous precisely because they are so attractive. They encourage people to live beyond their means, and they can become a habit for people who already spend more than they earn and still want to make unnecessary purchases.
So personal loans can be useful, but they can also be dangerous. How can you tell the difference—when is it a good idea to take a personal loan, and when is it a bad one? Here’s when you SHOULDN’T take one out:
- To pay for an expensive vacation or a luxury item. You might enjoy the trip while it lasts or get a kick out of owning an expensive new car, but when you return home or the novelty wears off, you’re facing a big debt that can send you crashing back to earth. A better idea is to save up the money before you make your purchase; that way, when you’ve got enough, you can take that vacation without worrying about making sacrifices later; plus, people tend to get more satisfaction from a reward if you’ve worked hard for it.
- To pay off other kinds of debt. You might be up to your ears in credit card debt bills, but paying them off with a personal loan is just shifting it around, and interest rates on personal loans are so high that you’ll probably end up paying more in the long run. There are better ways to consolidate debt.
Personal loans CAN be a good idea sometimes:
- To pay emergency repairs or medical bills. If there’s a hole in your roof and water is pouring in every time it rains, that’s a problem that needs to be addressed right away, whether it’s in your budget or not. Just make sure you’re only including real emergencies in this category; if the walls in your living room are an ugly color and you want to paint them, it doesn’t constitute an emergency.
- To make purchases that will better your financial situation. If you’re driving an big, old car that gets 8 miles to the gallon and needs frequent repairs, a personal loan for a small, efficient car can save you money in the long term. Same if you’re a mechanic who will be able to take bigger jobs if you have the right tools but can’t afford them at the moment.
The bottom line is that if a personal loan will improve your ability to make payments in the future, or if it’s really the only way to make an unavoidable payment, go ahead. If neither of those is true, though, ask yourself if you’re really living below your means—that’s the only way to stay debt-free. |