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Personal Loan Land Mines

Posted May 21st, 2010
by Staff

Like other kinds of credit, personal loans can be a mixed bag. They’re not quite like a home loan, which is almost always good because it gives you a lot of money at a low rate of interest. Personal loans can be a good thing, but they can also be a bad thing.

There are some important things to watch out for when you take out a personal loan, to make sure it’s worth it:

  • Be sure you can pay it. If you can’t make the payments on a personal loan, you’re going to have problems. If it’s a secured personal loan, such as a loan that you use for a  car or boat, the lender can repossess the property. Whether it’s secured or unsecured, not paying it can really screw with your credit.
  • Watch out for personal loans from family and friends. Yes, these can be a good thing. But if it doesn’t go well, you can mess up everyone’s Thanksgiving dinner with a heck of a lot of bitterness and anger. Think twice before asking family or friends for a personal loan, and even then go about it the right way.
  • Paying cash is better. There are only a handful of situations in which taking out a loan is better than paying cash, if you have it. A home loan, as we mentioned, is one of those. But for the most part, the meager interest you would earn on leaving the money in a savings account combined with the interest you’re going to pay on the loan just makes it a better thing to pay cash.
  • Be careful of debt consolidation. You might take out a personal loan to pay off a bunch of credit cards. While that can be a good thing, the danger is that you’ll go out and max out your credit cards again. If you use a personal loan to pay off debt, put safeguards in place to make sure you don’t just go out and accrue more debt.

Photo via Neil Rickards

Categories: Advice, Credit Card Fees



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