Good and Bad Reasons to Take a Personal Loan
“What is a good reason to take out a personal loan?” Unfortunately, there is no simple answer to this question 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. Save Money - Taking out a personal loan instead of using credit cards can actually save you money in the long run as the interest rates can be a lot lower for a personal loan. The average rate for a credit card is around 15.5% APR whereas with a personal loan you can find rates as low as 5.99% if you have a good credit score. Below is an example of how much interest you would pay on $10,000 worth of credit depending on the interest rate:
|Interest Rate||Interest Paid|
The lower the interest, the less you'll pay and because personal loans offer more attractive rates, you will save more money.
2. 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.
3. 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 setting up your 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 if the business isn’t successful. Other options include getting investors privately or through some sort of crowdsourcing.
4. 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.
5. 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.
6. Home Improvement to Flip a House – A home renovation can increase the value of a house more than the cost of the renovation. If you know a lot about your local real estate market, and you have some knowledge of design and/or construction, you may find a home improvement loan useful, especially if you are able to sell your home quickly and repay your loan swiftly.
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 could make your future financial situation unstable. If you are unable to repay your loan, it will significantly harm your ability to pay for other life milestones like a house or 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 lead to further financial insecurity. It’s crucial that you do all of the appropriate research and fully weigh the risks and rewards before taking on debt as this can have a long-term impact on your 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.