Personal loans are convenient, but they are not suitable for all situations.
- Personal loans can be flexible, but they may not be the right option for you.
- Consider how much you need to borrow and why you need the money.
- If you are a homeowner, a home equity loan might be a better option.
You may, at some point, find yourself in a situation where you are looking to borrow money. And you might be tempted to seek out a personal loan, especially if your credit score is in good shape. If you have excellent credit, you’ll be more likely to get an affordable interest rate on the money you borrow.
But while personal loans can be a good solution when there is a need for money, they are not necessarily the best choice for you. And if these three signs apply, you might want to avoid a personal loan and consider other options to get your hands on the cash you need.
1. You only need to borrow a small amount
It takes paperwork to set up a personal loan. As such, the banks and lending institutions that provide these loans want to make this administrative work worthwhile – and they often do so by imposing minimum loan amounts.
If you only need to borrow a small amount of money, 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
Personal loans can be an affordable way to borrow money. But if you own a home in which you have good equity, you could get an even cheaper borrowing rate with a home equity loan.
These days, home values are on the rise across the board, so if you own a property, you may have more equity than usual to operate. In this case, it pays to at least compare borrowing rates before rushing to sign a personal loan.
3. You are borrowing for the wrong reasons
The advantage of 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 house. But with a personal loan, you can use the money for any purpose.
But this flexibility has a downside, and that’s that you might be tempted to take out a personal loan for something not so critical, like a vacation (which is a good thing to have, but often not something worth going into debt). Or you may be looking for a personal loan to help cover your living expenses. But in this case, it might be better to rethink your budget rather than borrow money to stay afloat.
Is the personal loan 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 might come to the conclusion that it is better to borrow money another way. Or, you may decide not to advance with a loan at all.
The Ascent’s Best Personal Loans for 2022
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.