Personal Loans Let You Borrow for Any Purpose -- but Is That a Good Thing?

It's sort of a blessing/curse situation.

When you sign a mortgage, you're required to use your loan proceeds to finance the purchase of a home. And when you sign an auto loan, you must use that money to finance the purchase of a vehicle.

Personal loans are far more flexible. With a personal loan, you can borrow money for any purpose.

Want to furnish your new apartment? A personal loan could make that happen. Need to fix up your car? You can take out a personal loan and use that money to pay for new tires, brakes, or a well-functioning transmission.

But while the flexibility of personal loans is a nice thing for borrowers to enjoy, it also has a major downside. And that's something to be mindful of if you're thinking of getting a personal loan.

You shouldn't borrow for any old reason

You can technically take out a personal loan and use the money to buy cases upon cases of junk food. But that doesn't sound like the best idea, right? Well, along these lines, it's really not a great idea to use personal loan proceeds to pay for a non-essential expense.

So, let's say you're itching to take a vacation because it's been many months since you've escaped your current city. As much as a vacation might work wonders for your mental health, it's not a necessity. And if you don't have the money to pay for your vacation outright, then you're better off putting those plans on hold, saving up, and then hitting the road rather than taking out a personal loan to make your trip happen sooner.

Similarly, if you've recently gotten your own living space, you need certain basics like a bed, a kitchen table, and chairs right away. Functioning without those key items isn't really reasonable, and so taking out a personal loan to pay for those purchases isn't such a poor choice.

But that doesn't mean you should take out a personal loan and use the money to buy yourself designer end tables or furniture for your spare bedroom. Rather, you should save up for furniture pieces that you don't need immediately (and besides, there's nothing wrong with having guests sleep on your old futon for a few months).

Borrow carefully

Personal loans tend to charge less interest than other borrowing options, like credit cards. But that doesn't mean you should load up on debt of that nature without thinking through the consequences.

At the end of the day, a personal loan is still a loan. That means you'll pay interest on the sum you borrow, and you'll also risk wrecking your credit score if you happen to fall behind on your loan. And once your credit score drops, borrowing in an emergency could become difficult.

If you have a pressing need for money, such as to repair a car that won't drive, then by all means, get a personal loan and fix it up. But be very careful when signing a personal loan so you can indulge in something you should really be saving up for instead.