While a personal loan can be a good way of helping you finance almost any expense, it’s not always the best thing to do. Basically, meeting the qualification criteria for a personal loan doesn’t give you a green light to apply for a loan.
Before taking a loan, you should carefully review your current financial situation as well as your long-term financial goals. If you have a genuine reason to borrow, take your time to find the most appropriate loan product to help you cover the expense. If the need is not urgent, you can delay the expense and save some money to pay in cash instead of saddling yourself with debt.
In this article, you’ll learn about some problems that you should avoid solving with a personal loan.
Financing a car purchase
When you want to buy a car, it’s possible to take out a loan for the purchase. However, it’s not always wise to use a personal loan to acquire the car. If your credit score is good, you can easily qualify for an auto loan with impressive rates. In most cases, the interest rates are better than you can get with a personal loan of the same amount.
Unlike most unsecured personal loans, an auto loan is backed up by collateral. Most lenders accept the car that you’ve purchased to be the collateral for the loan. In the event where you are not in a position to service the loan, the lender is allowed by the law to seize the car and re-sell it in a bid to recover the money.
Because auto-loans are designed this way, the nation 21 lender bears lower risk compared to personal loans. As such, it’s easier to qualify for an auto loan which also has better interest rates than most personal loans. According to a study conducted by the Federal Reserve Bank, the average APR rates for a personal loan stand at 10.13% and you are supposed to clear the loan in 24 months. At the same time, auto loans have an APR of 4.24% and the repayments are spread over 60 months.
When you look at the rates closely, you realize that personal loans not only have a short repayment period, but they also have interest rates that are over 130% higher than auto loans. Generally, you need to pay more than double in interests for a personal loan and clear the payment in half the time it would take you to settle an auto loan.
If you intend to buy a car, getting a personal loan is not a wise move.
Refinancing a student loan
While personal loans can be used to pay for your college fees, it’s not the most appropriate source of funds. With a private or federal student loan, you can get an attractive deal than you would find on a personal loan.
Unlike personal loans, a federal loan requires no credit checks and you also get attractive borrower protection. At the same time, they tend to have favorable rates than personal loans. In addition, you can get tax deductions on interests accrued by a student loan which is impossible with personal loans. Contrary to the popular belief, these benefits are also applicable even when you are refinancing student debt.
Consolidation of smaller debts
Personal loans have been used in debt consolidation since it can lead to lower interest rates as well as ease of debt management. But it’s not always a good idea if you are trying to clear credit card debts.
Most people make consolidation decisions based on the promise of lower interest rates after debt consolidation. However, you can get a better deal by using a new credit card with zero interest rates for one year. As such, if the debt is small enough to be cleared within one year, then a balance transfer on an interest-free credit card may be the best option.
Covering some major expenses that can be planned for
When you are dealing with an emergency expense, it might be appropriate to take a personal loan to finance the expense. For instance, you can use it towards home and automobile repairs when you don’t have enough cash to finance the entire expense.
However, it’s important to know the difference between unforeseen expenses and ones that must be planned for. For example, if you intend to upgrade your kitchen it’s better to delay the expense and save up the required money to handle the remodeling rather than burden yourself with unnecessary debt.
Major life events call for adequate planning and preparation. If you want to do a wedding, it would be appropriate to start preparations early to avoid settling down when you are burdened with debt.
Financing a vacation
It’s an open secret that about 74% are more than willing to get into debt just to take a vacation they’ve longed for. The truth is that vacations are not necessities in life and you should only take them when you are financially stable.
If you intend to take a vacation in the near future, the best thing is to plan and save the required amount in full. Otherwise, you’ll be paying more for the vacation than it would cost you when you pay cash.
Every time you consider taking a personal loan, it’s important to ensure that it’s not going to have a negative effect on your financial profile. Most importantly, it’s better to delay some expenses and save the entire amount than getting into an expensive debt.