3 Reasons to Pass on a Personal Loan This Year

It may not be the ideal time to borrow.

There's a reason so many borrowers are drawn to personal loans. A personal loan lets you borrow money for any purpose, so if you don't want to be restricted in how you use your loan proceeds, it's a good bet.

Plus, you might manage to snag a relatively affordable borrowing rate on a personal loan. This especially applies if you have great credit.

But while personal loans certainly have their perks, now may not be the ideal time to take one out. Here are a few reasons to say no to a personal loan during the latter part of 2022.

1. Borrowing rates are higher

You'll generally get a much lower interest rate on the sum you borrow with a personal loan than you will with a credit card. That said, the Federal Reserve has been aggressively hiking up interest rates in an effort to slow the pace of inflation. As such, the interest rate you get on a personal loan today may be much higher than what you would've gotten at this time last year.

Now the tricky thing is that we don't know if borrowing is going to get more or less expensive next year. There's reason to believe the former might happen as rate hikes continue. But if inflation levels start dropping nicely, the Fed could pump the brakes on interest rate hikes, and borrowing rates could come down in 2023.

At this point, waiting to borrow money is a bit of a gamble. But we do know that personal loan rates are higher now than they've been in a while, so that's something to keep in mind.

2. You don't need to borrow so much

One great thing about personal loans is that they tend to close quickly. But that doesn't mean there's no work involved in putting one into place. As such, personal loan lenders tend to impose a minimum borrowing requirement to make that effort worth their while. And so if you don't need to borrow a lot of money, a personal loan may not make sense.

Let's imagine you need $600. You may find that it's hard to get approved for a personal loan that's less than $2,000. In that case, you may want to explore other borrowing options.

3. You have a less expensive choice

A personal loan can be a very affordable borrowing option compared to the other choices you're presented with. But if you're a homeowner, you may be better off taking out a home equity loan if your goal is to snag the lowest interest rate possible.

Like personal loans, a home equity loan lets you use your loan proceeds for any purpose. It's a big misconception that your proceeds have to be used for home improvements or repairs (though many borrowers do, in fact, use home equity loans for that purpose). So you might get the same flexibility at an even lower interest rate.

Taking out a personal loan could be a good solution when you need to borrow money. But right now, you may want to go a different route or, if possible, hold off on borrowing altogether until interest rates start to drop.