3 Signs You Shouldn't Take Out a Personal Loan

Bank teller assisting a customer with cash transaction.

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Personal loans are convenient, but they aren't right for every situation.

Key points

  • Personal loans can be flexible, but they may not be the right option for you.
  • Consider how much you need to borrow and what you need the money for.
  • If you're a homeowner, a home equity loan could be a better option.

You may, at some point, run into a situation where you're looking to borrow money. And you may be tempted to seek out a personal loan, especially if your credit score is in great shape. If you have awesome credit, you'll be more likely to snag an affordable interest rate on whatever sum you borrow.

But while personal loans can be a good solution when there's a need for money, they aren't necessarily the best choice for you. And if these three signs apply, you may want to steer clear of a personal loan and look at other options for getting your hands on the cash you need.

1. You only need to borrow a small amount

It takes paperwork to put a personal loan into place. As such, the banks and lending institutions that give out these loans want to make that administrative work worthwhile -- and they often do so by imposing minimum borrowing amounts.

If you only have a need to borrow a small amount of money, then a personal loan may not be a good idea. The last thing you want to do is borrow extra money just to meet a minimum.

2. You have a home with lots of equity in it

Personal loans can be an affordable means of borrowing money. But if you own a home that you have a fair amount of equity in, you might snag an even less expensive borrowing rate with a home equity loan.

These days, home values are up across the board, so if you own property, you may have more equity than usual to tap. In that case, it pays to at least compare borrowing rates before rushing to sign a personal loan.

3. You're borrowing for the wrong reasons

The great thing about personal loans is that they allow you to borrow money for any purpose. Other types of loans are more restrictive. With a mortgage, for example, you can only borrow money to finance a home. But with a personal loan, you can use the cash for any reason.

But that flexibility has a downside, and it's that you may be tempted to take out a personal loan for something that's not that critical, like a vacation (which is a nice thing to have, but often not something worth going into debt for). Or it may be that you're looking at getting a personal loan to help cover your living expenses. But in that case, a better bet may be to rethink your budget rather than borrow money to stay afloat.

Is a personal loan right for you?

You may decide that a personal loan is indeed your best bet for borrowing. Just make sure you've explored all of your options before making that call. You may come to the conclusion that you're better off borrowing money a different way. Or, you may decide you shouldn't move forward with a loan at all.

Our Research Expert