When you live paycheck to paycheck, borrowing money seems like a quick fix to the problem. However, it may not be the wisest decision because when the next payday comes, you’ll have to make repayments to clear the loan in addition to paying bills.
Borrowing money in the form of a personal loan makes sense in certain situations. Personal loans are of two types—secured and unsecured. Secured loans require you to provide collateral. If you fall behind on your payments, the lender may seize this collateral. Unsecured loans have higher interest rates because they’re not backed by collateral, which means more risk is involved.
When Getting a Personal Loan Is a Good Idea
A personal loan may work well in your favor if you use it to:
- Improve Credit: Getting a secured personal loan helps boost your credit (history). The longer you pay your bills on time and in full, the stronger your credit becomes. Having good credit helps you qualify for better interest rates when you apply for a mortgage or auto loan.
- Pay Off Debt: Taking out a personal loan to pay off higher-interest-rate loans can be a great way to save money. It makes sense to use a personal loan for this purpose if the interest rate is lower and you can afford the monthly payment. What’s important here is that you stay disciplined by paying off debt and not adding any additional debt.
- Save Money: It’s a better idea to take out a personal loan than to use a credit card if the interest rate on the loan is lower. You can save more money in the long run if you take out a lower-interest-rate personal loan as you have to repay less.
When Getting a Personal Loan Is a Bad Idea
Taking out a personal loan to pay for a wedding or a vacation is an unwise decision. Although going on a dream vacation or hosting an extraordinary wedding can make you feel great while it lasts, taking out a loan to pay for such expenses can lead to financial trouble. It’s risky to borrow money to pay for such events and can adversely affect your future financial situation. Instead, either save up for such experiences or downsize them so that you can enjoy them thoroughly without having to worry about the consequences.