Should You Borrow Extra to Meet the Borrowing Minimum for a Personal Loan?

There's a reason personal loans tend to be a popular borrowing choice among consumers. With a personal loan, you can borrow money for any purpose (whereas with a mortgage, for example, you must use your loan proceeds to finance the purchase of a home). 

Also, personal loans are unsecured, so you don't need to put up a specific asset as collateral. With a home equity loan, for example, you need to own a property that serves as collateral. 

Plus, the interest rates on personal loans tend to be pretty competitive. Granted, these days, borrowing rates are elevated on a whole thanks to the numerous interest rate hikes from the Federal Reserve. But even so, you may find that you can borrow at a reasonably affordable rate with a personal loan, especially if you have a great credit score.

But there's an issue you might encounter if you're looking for a personal loan. And while you might think you have a good solution for it, that solution might backfire on you.

Do you meet the borrowing minimum?

It takes time and effort to put a personal loan into place. Because of this, lenders tend to impose a borrowing minimum for signing a personal loan. 

Now, this minimum isn't universal, and each lender can set its own number. But many personal loan lenders require you to borrow $5,000 at a minimum. SoFi Personal Loans, for example, have this rule.

If it happens to be that you're looking for a personal loan for $5,000 or more, there's no problem. It's when you want to borrow less that a personal loan becomes trickier.

Don't force yourself to borrow more

If the loan amount you need is well below the minimum your personal loan lender requires, you may be inclined to just borrow more to have the option to sign that loan. But that's not a great solution.

The more money you borrow with a personal loan, the larger your monthly payments will be -- and the more likely you may be to fall behind. Also, the more you borrow, the more your loan will cost you in interest. While you could just pay off a chunk of that loan in one fell swoop if you didn't need the full amount to begin with, the question is, will you? Or will you keep the money and do something else with it?

Also, there are still closing costs and fees associated with putting a personal loan in place. And those can hinge on the sum you're borrowing. So all told, borrowing more than you need to isn't a great bet.

Is there a better alternative to a personal loan?

Unfortunately, there aren't many great options when you only want to borrow a small sum of money and don't meet the requirements for a personal loan. A credit card will allow you to borrow any sum you want in the form of a carried balance. But then, you risk racking up a lot of interest.

However, if you only need to borrow a small amount of money, and it's a sum you truly think you can repay within a year, then you may want to look at a 0% introductory rate credit card. 

The risk there is that if you don't repay your balance in full before your introductory period ends, you'll likely be slapped with a really high rate once interest starts accruing. This solution only works if you're convinced you'll be able to pay off your debt quickly.

But let's say you're looking to borrow $1,000 and you can only find a personal loan that allows you to borrow $5,000 at a minimum. Borrowing an extra $4,000 you don't need just isn't a great idea. You might tell yourself you'll repay $4,000 of that balance right away, but you might go in a different direction once you have your loan proceeds sitting in your bank account. So all told, it's a risk you probably don't want to take.