by Christy Bieber | Oct. 20, 2019
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When you take out a personal loan, you can use the money for any purpose you'd like. This gives you a ton of flexibility -- but it also allows people to take out personal loans even when borrowing probably isn't the smartest financial move.
Before you take out a personal loan, you should think carefully about whether it’s the right course of action. Since you'll have to pay interest and are committing future paychecks to the loan, it only makes sense if you're taking out a loan for a good reason.
To help you make your choice, here are some of the best and worst reasons for taking out a personal loan.
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Some of the best reasons for taking out a personal loan include the following.
If you owe a lot of money on payday loans, credit cards, or other high interest debt, then it makes a lot of sense to take out a personal loan and pay off these expensive forms of credit. If you can qualify for a personal loan at a low rate, repaying it will be much more affordable than continuing to pay a fortune in interest to your existing creditors.
Looking for a personal loan but don't know where to start? The Ascent's picks of the best personal loans help you demystify the offers out there so you can pick the best one for your needs.
If you owe money to multiple different creditors, you may be able to qualify for a personal loan to pay back several of your existing debts -- or even to repay all of what you currently owe.
If you're able to get a personal loan at a lower rate than your current debt, you can reduce the interest costs on the loans you already have. But even if you take out a loan at the same rate, you can still make payoff easier by having one creditor to pay instead of many. You won't have to make a choice on which debt to pay back first if you just have this one big loan to pay.
Having just one loan instead of multiple loans that each have their own minimum payments can also lower your monthly payments. Just be careful because if you lower your monthly payment too much by extending the time it takes you to pay back your loan, you could end up paying more total interest over time.
Sometimes it is absolutely essential that you pay for something you can't afford. For example, you may need urgent medical care and have to borrow to cover your deductible and copay costs. Or you may need to borrow to fund the purchase of a new refrigerator or a new car if yours goes on the fritz.
If you have to buy something you need but can't pay for outright, a personal loan may be a more affordable option than using a credit card or getting other kinds of financing, such as medical loans or payday loans.
Just be sure to compare the interest rates on the personal loans you could be eligible for versus other payment plans available for the item you need.
There are also some really bad reasons for taking out a personal loan -- including the following.
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Although a personal loan can be used to make big purchases, it shouldn't be used to purchase anything you don't really need. Lenders market personal loans for all kinds of purposes, from luxury vacations to big weddings. But taking on debt for optional purchases is bad news.
When you borrow for something unnecessary, you're hurting your future self because you're committing money you haven't even earned yet to paying principal and interest. It's going to be harder to live on a budget going forward when you've got a monthly loan payment to make, and you could be forced to shortchange your savings during the payback process.
You're also paying more for your unnecessary purchase due to the interest you'll owe on the loan. So just don't do it -- if you can't afford to pay for something fun and frivolous out of pocket, wait and save up for it or cut costs instead of borrowing.
If you're continuously living beyond your means, you may decide to borrow -- either to directly fund your excess spending or to pay off credit cards so you can free up credit and use the cards to keep funding your lifestyle.
While refinancing debt with a personal loan is smart if doing so is part of a broader plan to become debt free, it's a bad plan if you're not living on a budget and will just continue going deeper into debt.
If you can't actually make a commitment to live on what you earn, major financial problems are inevitable in the future. And a personal loan can't solve these problems for you.
Personal loans can help you with your financial situation, but only if you take out a loan for a good reason. Making smart choices about how and when you borrow will allow you to limit the interest you owe. That way, you can avoid committing too much of your money to debt repayment and can free up your savings for other important financial goals.
The Ascent team vetted the market to bring you a shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on The Ascent's top picks.
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