On the spectrum of borrowing options, personal loans are generally better than credit cards. Unlike credit cards, they have fixed repayment schedules, and you can borrow only a set amount — so you’ll know exactly how much it will cost to pay off your debt and when you’ll become debt-free. Personal loans also tend to have lower interest rates than credit cards, which can make them far more affordable.
Personal loans are usually a cost-effective way to get your hands on spare cash, but that doesn’t mean it’s always a good idea to apply for one. In fact, while there are some great reasons to get a personal loan, there are also some situations in which getting a personal loan would make no real financial sense at all.
Three great reasons to get a personal loan
Here are three of the best reasons to get a personal loan.
1. To consolidate and refinance high interest debt
Consolidating and refinancing debt is one of the best reasons to get a personal loan. If you can get a new loan at a lower rate to pay off expensive debt, you’ll save a fortune on interest. And by paying off multiple existing creditors at once, you’ll also make the payment process simpler, as you won’t have to juggle several payments. This makes it easier to avoid missing a payment by mistake.
Just make sure you’re committed to paying back the consolidation loan on time and not charging up any of the credit cards you paid off with the personal loan.
2. To move for a great career or educational opportunity
Moving can be very expensive, and sometimes a great opportunity comes up that necessitates relocating before you can save up enough cash to pay for your move.
If you get the chance to earn a degree that boosts your earning power or to enhance your career with an awesome new position, you don’t want to pass it up just because you can’t afford moving expenses.
Try to make your move as affordable as possible to minimize what you borrow, and opt for the shortest loan term possible so you can become debt-free ASAP.
3. To pay essential expenses off over time
There are times when expenses need to be paid right away. If you or a loved one needs essential medical care, for example, or if your car breaks down and you need to pay for repairs so you can get to work, you’ll have to find a way to cover the costs if you don’t have the cash.
A personal loan can be a cheaper way to pay for an emergency expense than a credit card, and you’ll also have the predictability of knowing exactly how much you’ll pay each month and when the debt will be gone.
Three terrible reasons to get a personal loan
While it makes sense to borrow for essential purchases, to consolidate debt, or to pursue valuable opportunities, there are also times when taking out a personal loan is likely a poor financial choice. Here are three examples.
1. To splurge on an awesome vacation
Everyone likes going on vacation, but vacations are not a necessity. You don’t want to waste a fortune in interest by borrowing to go on vacation, so just say no to taking out a personal loan to fund a trip. Instead, opt to stay closer to home and go on a vacation you can afford to pay for with cash.
If you want to take a truly amazing trip in the future, start saving up cash now — and consider using a travel card for everyday expenses, so long as you can pay the bill off in full each month. The travel card could help you earn miles or free hotel stays that make your trip cheaper when the time comes time to get on the plane.
2. To pay for your college education
Going to college can definitely expand your opportunities. And most people need to take out loans to go to school. But a personal loan is the wrong way to borrow for college. Instead, you should opt for federal student loans.
Federal student loans have fixed interest rates that are lower than personal loan rates, and the interest is tax-deductible so long as you don’t make too much money. Furthermore, federal student loans come with many borrower protections that personal loans don’t offer, including the possibility of suspending monthly payments in times of financial hardship. There’s even the potential to have loan balances forgiven if you work in public service or pay your loans on an income-based payment plan for a certain number of years.
While it can make sense to borrow money to enable yourself to pursue higher education, steer clear of personal loans and choose a student loan instead.
3. To cover everyday living expenses
Taking out a personal loan to cover everyday expenses is impractical. Personal loans require you to borrow a fixed sum of money up front, unlike credit cards or lines of credit, which allow you to borrow as much or as little as you need, up to your credit limit. Since you don’t usually need to borrow thousands of dollars all at once to cover living expenses that you incur over time, a personal loan won’t work to fund the basic costs of living.
Personal loans are also usually paid back over the course of several years, and you don’t want to be paying for today’s gas or groceries in three years or five years. In fact, borrowing at all to cover personal expenses is bad news, as you could find yourself deep in debt if you’re living beyond your means. Instead, you need to live on a budget and get your debt under control.
If you have a short-term need to cover immediate expenses and you absolutely must borrow, a 0% APR card or a payday alternative loan from a credit union could be the right approach. But pay off the debt ASAP and make a plan going forward so your bills can be paid by the income you have coming in.
Be smart about borrowing with a personal loan
Remember, even when you have a good reason for taking out a personal loan, you don’t want to borrow more than you need. You should always shop around to find the most affordable loan in order to keep your interest costs down and so paying off your debt will be easier.
Our Picks of the Best Personal Loans for 2019
We’ve vetted the market to bring you our shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on our top picks.