A personal loan can be useful in your financial strategy if you use it responsibly. A number of good reasons exist for taking out a personal loan, including:
Purchasing or renovating a home
Most financial experts suggest that taking out a loan for an appreciating asset is a good use of debt. For example, a student loan that will increase your future earning power or a mortgage loan that allows you to own a home are good reasons for taking out a personal loan.
A personal loan can also be an effective alternative to high-interest credit cards. Many consumers charge their purchases with a credit card and treat that charge as a loan, carrying over their balances from month to month. If you’ve already amassed a large amount of high-interest debt, taking out a debt consolidation personal loan might be a good idea.
A debt consolidation loan bundles your existing debts into one package that allows you to make one monthly payment instead of many. If you can get a lower interest rate on the debt consolidation loan, the loan might enable you to pay off your debt more quickly. For example, if you have credit card balances with an average 20%-22%, you could take out a no-fee debt consolidation loan with an average interest rate of 13%-15%. By doing this, you’ll save 7%-6%in interest charges.
Bad Uses for a Personal Loan
Although you can borrow money to use in whatever way you want, you should exercise caution when using a personal loan. Some poor uses of a personal loan include:
A personal loan shouldn’t be used to increase your spending on unnecessary expenses. Consider the fact that a vacation, wedding and material goods last for a short period of time; but if you don’t pay it off quickly, the debt can last for years. By taking out a personal loan for consumable debt, you’re sacrificing the opportunity to build up your savings or retirement investing — and hurting your own financial future.
Depending on your financial habits, a personal loan could be a crutch for someone who has a problem with excess spending. Some individuals might continue to add to their debt as they reduce their total loan payments. If you’re susceptible to this tendency, you’re better off just paying off your existing debt as quickly as possible.