Are Personal Loans A Smart Choice?
We all are regularly offered personal loans through television and mail advertisements. If you are facing an unplanned issue and aren’t able to pay for it, you may be tempted to take advantage of those offers. Whether that is a smart choice or a bad one is a matter of perspective.
Personal loans are a popular form of credit. If you apply for a personal loan, your interest rate, monthly payments, and fees, will vary depending on your credit score and history. Personal loans can be your best option for consolidating credit card debt into one payment or if you need to make a big purchase and don’t have the funds necessary.
When are Personal Loans a Smart Choice?
Applying for a personal loan can be a smart financial decision, under the right circumstances. A debt consolidation personal loan can be a great option to help get you out of debt without overspending. If your current interest rates are higher than the rate you can get on a personal loan, and the monthly payment amount does not exceed your budget, it is the best choice. If the rates of the loan exceed your current rates, it is best to consider other debt relief options.
Another possibility is when an emergency arises. While financial “best practice” dictates having an emergency fund to cover these types of one-time, unscheduled bills, if you don’t have that set aside a personal loan may be your best option. For example, if your car breaks down, it is better to incur the cost of a personal loan and get it fixed than it would be to lose your job because you can’t get to work. This applies only to necessities and in situations that don’t allow for a lot of flexibility.
A small personal loan can also help you build credit. If your credit score is low, you will have to pay a high interest rate, however, for small loans, the overall cost may be low enough to be worthwhile. A common reason to need this is if you’re trying to qualify for a big purchase like a mortgage. The difference in interest rates for someone with a good credit score can make a huge difference over the life of a mortgage loan and is far lower than the cost of taking the high-interest personal loan.
When are Personal Loans Not a Smart Choice?
If your credit score is not in the good to excellent range, it is best to avoid personal loans. In most cases, the loans will not be available to you with bad credit. Be wary of the ones that are, as they are often considered debt traps with high interest rates and associated costs.
Another reason to avoid personal loans is if it is going to add to your already heavy debt load. Always be sure that you can affordably take on additional monthly payments before you make a decision to take on any new debt.
Conclusively, personal loans can be useful in the right circumstances and detrimental in the wrong ones. Be sure to consult with a trustworthy financial institution, do your research, and weigh your options before making any decisions.
