Personal loans can be a great way to consolidate higher-interest credit into a single payment with a better interest rate. They can also be a great way to get some money for college, or make certain kinds of purchase. There are also times when taking out a personal loan is just stupid.
When you can’t repay the loan
If you’re certain that you can make the payments, taking a personal loan is fine. For example, if the minimum payments you’ve been making to credit cards are $100 a month and you take out a personal loan with payments of $100 a month, you’re all good. However, if you’re having trouble making your payments already, getting a personal loan that obligates you to spend the same each month isn’t going to help. In that kind of situation, you’d need to find a personal loan that will have lower payments than what you’re currently paying.
When you use the loan for something that’s not essential
Yes, it’s cool that your friends are all talking about going to Cabo for spring break. The fact of the matter is, though, you don’t have the cash. If you take a personal loan to fund your trip, you’re mortgaging your future financial situation for a short-term pleasure. You’re much better off setting aside the money you’d pay on the loan for next year’s spring break trip. That way, you can earn interest rather than paying it.
When the interest rate blows
You might have decent credit. That means you’ll get a decent rate on your personal loan. Sure, it’s not going to be as good a rate as a secured loan, such as a home loan or a car loan, but it should be competitive. If you’ve had credit problems, or if you haven’t yet established a decent credit history, you’re probably going to be asked to pay a much higher interest rate than someone with a decent track record. That means paying more for the loan over the long haul.
When you’re living beyond your means
Some folks take out personal loans for spending money or living money. That’s never a good sign. If you can’t meet your obligations with the money you have coming in now, a payday loan isn’t the answer. Instead, you need to buckle down and stop living beyond your means. Learn to budget, and learn to say “no” to extravagances. Work hard to improve your employment situation and prospects, so that your income will more closely match the lifestyle you want.
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