Before You Take Out a Personal Loan, Ask Yourself This

It's a really important question.

There's a reason consumers are commonly drawn to personal loans when the desire or need to borrow money arises. Personal loans are flexible in that they let you borrow money for any purpose (whereas when you take out a mortgage or auto loan, for example, you must use the funds for home- or car-buying purposes, respectively).

Plus, personal loans tend to close quickly. It's possible to apply for a personal loan and have your money in hand within a week.

Personal loans also tend to offer competitive interest rates. You'll generally pay less interest on a personal loan than you will on a credit card balance you carry forward. And whereas credit card interest tends to be variable, with a personal loan, you can lock in a fixed interest rate on the sum you borrow. The result? Predictable ongoing payments that are easier for you to work into your budget.

But while it's easy to see why personal loans appeal to so many people, the reality is that it's important to take one out under the right circumstances. And so there's one essential question you'll need to ask yourself before moving forward with a personal loan application.

Am I borrowing for something I need, or just want?

Because personal loans let you use your proceeds for any purpose, you can take out a personal loan and use it to complete a major home repair or fix up your car. And both of those are a good reason to take out a loan.

But taking out a personal loan to go on vacation or upgrade your electronics is a different story. And you may want to think twice before applying for a loan to finance these types of purchases.

Although personal loans tend to come with competitive interest rates, you're borrowing money nonetheless. And you're paying extra for the things you're buying because you're paying some amount of interest, even if it's not an exorbitant amount.

It's one thing to take out a personal loan to address a need, like fixing your car or replacing essential household appliances that have stopped functioning. But it's another thing to take out a personal loan so you can indulge in a luxury trip. The latter is something you're generally much better off saving up for -- whereas you can't always put off a home or car repair.

All debt has consequences

Any time you borrow money, you commit to a series of debt payments that will monopolize a portion of your income. And if you fall behind on any debts you take on, you'll risk extensive credit score damage.

That's why you'll need to be careful when taking out a personal loan -- and make sure you're borrowing money for a good reason. You might enjoy taking a trip or buying new things for your apartment. But the stress of having to pay off a personal loan could take away from that benefit and cause you financial hardship. So if you're not borrowing money to address a need, but rather, a want, then you may want to seriously reconsider.