Good and Bad Reasons to Take a Personal Loan
One of the most frequently asked questions when it comes to personal loans is “what is a good reason to take out a personal loan?” Unfortunately, there is no simple answer because there are a variety of good reasons to take out a personal loan as well as many reasons not to. Below are the reasons you should and shouldn’t take on debt.
Good Reasons to Take on a Personal Loan:
1. Improving your credit – Taking a loan establishes credit, and can constitute something as relatively simple as applying for a credit card. The longer a person uses their credit card without having a large outstanding balance, the stronger their credit becomes. Good credit leads to cheaper borrowing rates when it comes to something like a mortgage or auto financing.
2. Becoming an entrepreneur – Generally, to get a business loan, a business must have positive cash flow and be an established business for at least 6 months. Therefore, one way to finance the creation of a business is by taking out a personal loan. Though it is a good way to get capital, it is a risky proposition since there is no fallback in the business isn’t successful. Other options include getting investors privately or through some sort of crowd sourcing.
3. Paying Off Debt – Getting a loan to pay off debt with high interest rates can be a great way to save money. If a borrower can get a better interest rate and can afford the monthly payments of a new loan, most likely because it is longer term, they should do so. It is a great way to repair damaged credit and alleviate an existing debt burden.
4. Medical Expenses – A person’s health is not something to be undervalued. Of course if there is an emergency situation, a loan can be an option. Additionally, delaying a medical procedure may actually cause more problems, and be a bigger, long-term financial burden.
5. Home Improvement to Flip a House – A home renovation can increase the value of a house more than the cost of the renovation. If a borrower is knowledgeable about their local real estate market, and has some knowledge of design and/or construction, they may find this loan beneficial, especially if they are able to sell the home quickly and repay their loan swiftly. This can be a risky endeavor, but also potentially a very useful tool.
Bad Reasons to Take on a Personal Loan:
1. Wedding/Vacation – Although a once in a lifetime experience can provide lasting memories, it is just that, a single experience. Taking on a loan to pay for a single event can make a borrower’s future financial situation unstable. If they are unable to repay that loan, it will significantly harm their ability to pay for other life milestones like a house of a child’s college education. In most cases it is just not worth the risk.
2. Green/Payday Loans – These ultra short-term loans should only be used as a last resort. They have have what seems like a reasonable interest rate, but when APR is calculate with all the fees incurred the rates can actually be in excess of 100%. These are extremely expensive, and can add up to really hurt a borrower’s credit.
3. Investments – Taking on a loan to invest money in the stock market is called borrowing on margin and can be an extremely risky proposition. There is no such thing as a “sure thing” in the financial markets, and any investment can turn sour rapidly. It is not worth the possibility of living a debt-burdened life to make money quickly.
Personal loans can be an excellent tool when properly used, but have the potential to be improperly treated. It is crucial that a borrower do all of the appropriate research and fully weigh the risks and rewards before taking on debt. This is a decision that can have a long-term impact on a person’s financial future.
Now that you understand the best reasons for taking out a personal loan, check out our list of the best personal loans and find the right loan for your needs.