Are Personal Loans A Bad Idea?

Are personal loans always a bad idea?

Many people have this view, because predatory loan practices can harm borrowers who don’t have strong financial management skills. If you’re not careful, a personal loan can leave your with large amounts of interest and potentially lead to further financial difficulty.

With proper planning, however, some personal loan agreements can be a useful option to help you financially. This discussion will help you assess a personal loan, understand the risks involved, and allow you to make an informed decision.

Consider these tips:

Timelines

If you can’t meet the repayment schedule, a personal loan is a bad idea, and will damage your credit rating.

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To make an informed decision, create a personal budget, and separate your expenses into fixed (car payment, apartment lease) and variable (meals and entertainment) expenses. Your personal loan repayment must fit into your personal budget plan.

Be mindful that taking a loan is a long-term commitment, so plan for that commitment before you take out the loan.

Your first priority is to plan your loan repayments. Once that plan is in place, you can think about how you’ll use the personal loan dollars. There are dozens of useful financing websites where you can read more about the best terms possible for you.

Why?

Why are you taking out a personal loan?

Use loans to address your most important needs. This might be to help you sustain yourself in an emergency until payday, or to pay for a car repair. Never use a personal loan for an item that is a “want”, rather than a “need”, such as a new television or a brand new top of the line phone. You can do without these items until you can generate the income to pay for them in cash.

Remember, a personal cost comes with a cost. You’ll incur interest expense on the loan, and you’ll damage your credit rating, if you don’t make the payments on time.

Credit History

Repaying loans can be a fantastic means to rebuild credit history, as long as it’s not abused.

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A personal loan, paid back in full and on time, can help build your credit rating, but it should never be the main reason for taking out a loan.

Loans may necessary, if you have a bad credit history and are in need of an emergency cash injection. Personal loan terms are less favorable than a traditional bank loan, in order to offset the higher risk the lender is taking, but paying back the loan can help you slowly build your credit history.

How Often?

Think about the frequency with which you’re taking out loans, and never take out an expensive personal loan to pay off a lower-interest debt. In the long run, you’ll pay a higher amount of total interest.

Remember, loans are not a bad or a good thing, and they should only be used occasionally. Take responsibility and ensure you’re emotionally and mentally calibrated for the burden of a loan before you take it.

Plan Carefully

If you can plan your loan repayments and only borrow money when absolutely necessary, a personal loan may be an option for you.

This post is for educational purposes only.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

Co-Founder: accountinged.com

(email) ken@stltest.net

(website and blog) https://www.accountingaccidentally.com/

(you tube channel) kenboydstl

 

Image: Bullseye, Jeff Turner CC by 2.0