This week’s reader question was, “Should I get a personal loan?” This is actually quite a common question.
Sometimes people fall into the trap of payday loans (which I would avoid like the plague!) and after seeing how destructive those can be, I figured it would be good to address this question. This way you will know about other solutions that don’t involve payday loans or title loan companies.
But first, let’s get the customaries out of the way.
Every Friday I will feature a question from one of you, my dear readers! If you need answers, I want to do my best to provide them and I don’t want you to hesitate to reach out.
With that said, there are several ways you can ask a question. First, you can leave a comment in the comment section below. Second, feel free to shoot an email to latoya at lifeandabudget dot com. Third, you can use the contact tab above, AND finally, you can also submit your question using this easy, simple Google Form.
Now, let’s tackle this question!
Should I Get a Personal Loan?
First, I’m going to start out by saying that I can’t tell you whether you should get a personal loan or not.
I know, I know – that sorta defeats the whole purpose of this whole reader question thing, right?
Well, not really. Because I’m actually going to do better than giving you my opinion of whether you should take out a personal loan.
People actually take out personal loans for many different reasons and if your credit is right, this can actually be helpful to some of you. Not everyone has access to personal loans because of past credit mistakes which are why we see the prevalence of payday lending these days.
However, if you have been prudent about keeping your credit intact, getting a personal loan can solve many woes you may currently be experiencing. So, to educate you as best as possible, let’s talk about what a personal loan is, why they are a great idea for some, the pros and cons, and all that good stuff.
By the time you finish reading this, you should be able to answer your own question.
What is a Personal Loan?
A personal loan is an unsecured loan that you can get with a bank or credit union. Basically, an unsecured loan helps borrowers purchase a large expense or consolidate high-interest debt without any form of collateral.
This is quite different from something like an auto loan (which is secured) where you borrow the money to purchase a car and the car is used as collateral against the loan. This means that if you decided to stop paying the bank or credit union, they’re coming to jack your (their) car, so to speak.
Since no form of collateral is involved, the interest rates are typically higher on personal loans; however, they are better than credit card interest rates. This is why they are appealing because you can consolidate many high-interest rate cards into one personal loan. These types of loans can actually help you save money if done right.
Who is a Personal Loan Ideal For?
A personal loan is ideal for someone who has a solid history of paying their bills on time. This is precisely why those with good credit scores are often able to secure these types of loans at an affordable interest rate.
The bank, in their right mind, isn’t going to hand out a loan with no collateral to someone with a less than desirable credit score. With credit comes great responsibility.
You’re expected to treat it exactly as it is — a loan, not a wad of free cash.
However, I recognize that not everyone has a bad credit score by choice. Some people take a hard hit to their credit score simply because of life circumstances beyond their control. With that said, if you’re struggling to make ends meet because of a cash flow problem — a personal loan might not make it any better.
You will need the money to pay back a personal loan and if you can’t find cash to pay existing bills, it’s unlikely you’ll come up with another payment. Therefore, only seek a personal loan if you have the means to pay it back within a reasonable amount of time.
Who Are You – Toni and Mason or Kacey and Timothy?
To put things into perspective, let’s consider two different people with different sets of circumstances.
Toni and Mason
Toni and Mason are your typical upper-middle-class couple. There really is nothing out of the ordinary about them. Mason is a local barber and Toni is a nurse. They live in your average suburban neighborhood, drive a Tahoe and a Honda Civic. Toni has a daughter from a previous relationship and the couple is expecting their first child together.
Toni has excellent credit and Mason’s is okay. He’s been working on his spending habits since he and Toni married and his credit score is improving. They are in the process of building their three to six-month emergency fund and they also have $1,000 set aside for house maintenance. They figured that amount was reasonable; however, they never expected their HVAC to go out. Living in Louisiana, being pregnant, and being hot was not a fun idea to Toni so needless to say, the thing had to be fixed.
Even with $1,000 in their house maintenance fund, they were still short. Their emergency fund didn’t have enough funds to cover the expense either. Toni and Mason decided to go to check online to see if they could get a personal loan for the difference to cover the purchase. Luckily, they were able to secure a 3-year personal loan with a 2 percent interest rate.
Kacey and Timothy
Kacey and Timothy are not your typical couple. From the outside looking in, they are ballers. They live in an upper-class neighborhood about 10 miles outside of the city of Columbia. Kacey is a director at local Fortune 500 company. Timothy is a school administrator at a local private school. This couple has an Audi and a Rover sitting in the garage attached to their 5 bedroom home and they have one child.
Kacey and Tim both have great credit scores and they pride themselves on it; however, they are overextended. The five-figure mortgage, two car notes, private school tuition for their daughter, student loans, and multiple credit cards are hitting them pretty hard. Not to mention that Kacey needs her weekly spa manicure and pedicure. And Timothy, oh, he’s going to get his game of golf in every Saturday at the country club (yep, another expense).
They both have been considering taking out a personal loan to consolidate their credit cards. They also want to do some backyard landscaping. Kacey and Tim head to the bank to see what they can do for them and walk away disappointed. While they can borrow enough at a lower interest rate to consolidate their credit cards, that backyard landscaping project will have to wait. But did they need it anyway?
When Should You Use a Personal Loan?
Now that I’ve done my storytelling for the day, let’s discuss when it’s ideal to take out a personal loan.
It’s quite obvious from Toni and Mason’s situation that the personal loan was being used for an emergency of sorts. I don’t know about you, but being pregnant in the South with no air conditioning doesn’t sound fun.
I can totally relate to this scenario because we recently had to have our HVAC repaired this summer and while we didn’t use a personal loan, we did use a low-interest rate form of credit to finance that bad boy. While I may not appreciate the bill that accompanies, I can totally dig the air that came flowing through the vent after a few days in the summer heat.
On the other hand, Kacey and Timothy had good intentions in wanting a loan to consolidate their debt. I mean, this move would save them money. However, in the end, they wouldn’t have really been saving anything if they received a loan big enough to cover landscaping their backyard! It’s obvious that these two need to develop a savings habit so they could afford such luxury items. Toni and Mason were already savers so this was no problem for them.
With this being said, the only reasons I would recommend using a personal loan is for debt consolidation and emergencies.
If you are a saver and an emergency arises where you won’t have enough in your savings to cover the expense — you may want to consider a personal loan.
If you can save money, you’re probably more than capable of paying back a loan. Just remember, that the loan isn’t free cash and I would encourage you to find a way to pay it back as quickly as possible.
If you want to save money on high-interest rates, a personal loan may do you a favor or two as well. You’re going to be paying the debt back anyway so why not save money while doing it. The money you’re saving in interest can go directly to the debt to help you pay it back even faster.
When Should You Not Get a Personal Loan?
We’ve discussed reasons that may warrant the use of a personal loan. I’ve also given you one glaring reason not to use one either with our Kacey and Timothy example. Taking out a personal loan for luxury items, vacations, or other wants can lead to bigger problems.
There’s usually a reason people don’t have money for things like vacations or certain wants. That’s because they can’t afford it or they don’t know how to save money!
If that describes you, you need to increase your income and/or build a consistent savings habit. Saving for wants and luxury items is rewarding because you’ll be enjoying those things debt free. I mean, who wants to go to Tahiti and come home to a Tahiti bill? Nah.
Personal loans are awesome tools for people who need to pay for a necessary expense. Therefore, don’t be afraid to seek a personal loan if the expense is manageable and something you wouldn’t regret purchasing. Borrowing only the amount you need and pay it off quickly as possible. Doing so will allow you to focus on building your savings up to an even better level.
Related Reading: 12 Ways to Trick Yourself Into Save More Money
Where Should I Look For a Personal Loan?
You could seek a personal loan through the bank; however, the application process may prove to be a bit tougher. And remember, as I previously stated, since there is no collateral to back up the loan you will need an excellent credit rating.
On the contrary, you can search for personal loans using reputable online lenders like So-Fi. You can also use this resource to compare competitive interest rates and terms from multiple online lenders too.
Wrapping Thangs Up
In a roundabout way, I probably have answered your question. You’ve learned what a personal loan is, who should use them, and what you should use them for. Depending upon your own individual circumstances, I’m sure you have enough information now to answer yourself. You truly know yourself and your situation better than I do.
If you are a Toni and Mason, a personal loan may help you float a necessary expense for which you might not have sufficient savings to purchase. If you are a Kacey and Timothy, a personal loan could help you save money on interest; however, a personal loan for wants will only put you further into debt. A personal loan is not free money. Remember this as you reach your ultimate conclusion.
Have any of you ever taken out a personal loan? What would you advise this reader?