Should I get a personal loan?


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Personal loans can be taken out for just about anything: debt consolidation, medical bills, a bloated wedding budget. It is this flexibility that makes personal loans both attractive and potentially dangerous for the borrower.

Whatever your reason for getting a personal loan, if you don’t have a plan to pay it off, you could have to pay thousands of dollars in high interest debt. A late payment – or worse, a delinquent loan – could put you in a bad position with credit reporting agencies, making it harder to get a credit card or rent an apartment. day.

Before taking out a personal loan, ask yourself: can I afford to go into debt? Am I getting the best deal? What would I give up by going into debt? Would a loan be needed now?

Here’s what you need to know about personal loans and what you should and shouldn’t use them for.

What is a personal loan?

A personal loan is, as the name suggests, a fixed installment loan that can give you quick access to cash for personal use. Most personal loans are unsecured, which means that they are not backed by collateral. Unsecured loans tend to have higher interest rates than secured loans because they are riskier for the lender. However, since the borrower is not at risk of losing their assets – such as their home or car – if they fall behind in their payments, unsecured loans are generally better for the borrower.

Beyond the basic limitations outlined by your loan provider – many personal loan companies do not allow their personal loans to be used for business, investment, real estate, or education purposes – you can use a personal loan for just about anything. Some of the more common uses of personal loans include debt consolidation, home repairs, and emergency spending. However, it is important to remember that while personal loans can give you access to money quickly, it is far from. free money. Interest rates for personal loans depend on your credit score and the terms of your loan, and can be quite high for those with poor credit. Before taking out a personal loan, make sure that it is really needed and that you have a plan to pay it off. And depending on your needs, you may want to consider other options like a credit card with balance transfer or a home equity loan.

When should i get a personal loan?

Debt consolidation

One of the most popular use cases for personal loans is credit card debt consolidation. Anuj nayar, Financial Health Manager at LendingClub, says, “When we started in 2008, we positioned ourselves as a better way to get a loan for whatever you wanted. It could be home renovations, vacations, whatever. What we found was that clients came to us en masse for debt consolidation – and the vast majority of them were people looking to refinance credit cards to get back on the road to health. financial.

At an average APR of 15%, with some cards exceeding 25%, credit card debt can be costly and overwhelming. It’s a difficult treadmill to get off, so personal loans can be beneficial. To cover the debt, you take out a fixed amount of money at a fixed interest rate, and you pay a fixed monthly payment.

With proper budget planning and automated payments in place, managing personal loan debt can be simpler than managing credit card debt, the interest rate of which is usually variable. For comparison, personal loan interest rates can vary between 5% and 36%, depending on your creditworthiness and the terms of the loan. But to be clear, since loan interest rates can easily exceed higher credit card rates, this decision only makes sense if you can get a personal loan with an interest rate lower than the APR from your credit card.

If you have good credit, a balance transfer credit card can be a great alternative. Some cards offer 0% APR for an introductory period, typically 12-18 months, and allow you to transfer your existing balances from other cards for a one-time fee. If you are looking to consolidate your credit card debt, a balance transfer card can work as the equivalent of a 0% interest personal loan, as long as you pay off the balance before the end of the term. launch. Otherwise, you will be forced to pay high APRs by credit card.

If you are having trouble with debt management, we recommend that you contact your creditor first. Often times, lenders are ready to work with you in tough times. Whether it’s deferring payments, negotiating a lower interest rate or monthly payment, or waiving fees, getting housing from your lender will make it easier on you and your credit score in the long run. You can also find help from free credit counseling services, which won’t provide you with money directly, but can help get your finances in order.

Home repairs

Home improvement, whether it’s a renovation or a repair, is another common reason to take out a personal loan. If you have a roof leak, termites, or utility issues, you may be responsible for securing a personal loan to help cover large upfront costs and pay off expenses over time. However, if you are considering knocking down walls for an open floor plan or digging the backyard to build a swimming pool, consider whether this is a significant reason for potentially contracting dozens of people. thousands of debts and what would be a reasonable loan amount. .

“Don’t borrow too much,” says Farnoosh Torabi, financial journalist and host of the “So Money” podcast. “No matter what type of debt you take on, especially a personal loan, you don’t want it to exceed 5-10% of your monthly budget.

And again, having a plan – and the means – to pay off a loan is important, especially for non-essential home repairs that could potentially be postponed for now. It might make more sense to take out a loan for long-planned home repairs if you are confident about your financial stability in the near future.

If you need to borrow a large amount for home renovations, you may be able to find higher loan values ​​and better interest rates with a Home Equity Loan, Home Equity Line of Credit (HELOC ) or cash refinancing. These options all allow you to tap into the equity in your home for access to cash, but do so in different ways. However, be aware that they all require you to use your home as collateral, which can be riskier than an unsecured personal loan.


First, the Funeral Consumers Alliance, a nonprofit consumer advocacy organization, does not recommend taking out a loan to fund a funeral, due to the high interest rates these loans are often associated with.

That said, the average cost of a funeral was $ 7,360 in 2017, according to the National Funeral Directors Association. That’s a huge amount of money for most people, but especially for those grieving a loved one and perhaps navigating financial uncertainty elsewhere. If the funeral cannot be paid for out of pocket or with life insurance, surviving family members may find themselves considering personal loans as a measure of last resort.

We agree that personal loans should be an absolute last resort in the face of funeral expenses, but if you feel they are necessary for your situation, you should at least seek loan estimates from multiple lenders to secure a rate and terms that cause the least additional difficulty. down the line as possible.

When should i not get a personal loan?


According to the WeddingWire Newlywed Report 2020, couples spend an average of $ 30,000 on their wedding. The cost has increased each year as valuables – like bridesmaid dresses, wedding favors, and the next day’s brunches – turn into essential expenses. Many services, such as catering and venues, automatically cost more if the word “wedding” is spoken only once, so it’s obvious that people may want to get a personal loan to handle the rising costs.

However, we do not recommend going into debt to pay for a wedding. Incurring $ 30,000 in debt early in a marriage will add unnecessary pressure to this new stage in life and limit your ability to invest in a home, savings or retirement accounts.


Some people use personal loans to pay for travel expenses, such as flights, hotels, and excursions, and to pay off debt in the months or years that follow. Before you call your bank for financing for a trip to Venice or Lake Tahoe, it’s important to note that these loans can be expensive and charge high interest for those with poor credit.

It can also be a rude wake-up call to come back from vacation with a big bill and no way to pay it back. LendingClub’s Nayar says personal loans are best used for emergencies or financial recovery, not to “advance an Instagram lifestyle.”

Instead, try saving for vacations over a period of time, take advantage of airline and travel deals, and use your credit card’s reward points to earn cheap or free travel.

Student debt

Personal loans can be used to consolidate all kinds of debt, including student loans (although some lenders may have restrictions on this). However, this is generally not recommended unless you have student loans with unusually high interest rates. Most student loans have lower rates than personal loans, and when you switch your student loan to a personal loan, you lose access to deferrals, forbearances, and other types of payment arrangements. This is especially true if you have federal student loans, which offer a lot of protections that private lenders don’t.

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