5 Money Problems You Should Never Solve With A Personal Loan

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Personal loans give you the option to fund almost any purchase, but applying for a loan is not always wise. The fact that you qualify for a personal loan (even one with a great interest rate) doesn’t mean you should sign that loan agreement.

If you should take out a personal loan ultimately depends on your situation and your financial goals.

If you have a real need for credit, go ahead and find the product that makes sense – it won’t always be a personal loan. Sometimes it’s better to postpone a purchase, save, and pay cash rather than burdening yourself with additional debt.

Here are five times when you should reconsider taking out a personal loan and move on to other options instead.

1. Pay for college or refinance student debt

Figuring out how to pay college isn’t easy. Personal loans are an option, but should not be the first choice.

Most students will get a better deal with government or private student loans than with a personal loan. For example:

  • Federal student loans do not require a credit check and offer robust borrower protection.
  • The interest rates on government and private student loans are typically lower than the interest rates on personal loans.
  • Student loan interest is tax deductible, but personal loan interest is not.

These benefits also apply when trying to refinance student debt.

There are advantages too with a personal loan to replace student loans. You can:

  • Remove a co-signer from debt
  • Combine several loans into one payment
  • Get a better term or price

But these benefits aren’t limited to personal loans. You can also get them – and a few more – when you refinance student debt to replace it with a new student loan. Refinancing private student loans usually offers significantly lower interest rates than personal loans, and you still get that student loan tax deduction.

2. Finance a car

I recently bought a car and financed it with a car loan. It’s the first debt I’ve taken on since paying off my $ 107,000 student debt.

It helped me qualify for a great auto loan – better than I’m likely to find on a personal loan.

Unlike an unsecured loan, a car loan is secured debt that is backed by collateral – usually the car you are buying. If you cannot repay the debt, the lender can repossess the car and sell it to reclaim the money borrowed.

Because auto loans are structured this way, there is less risk for the lender. And because the risk is lower, auto loans are often easier to qualify and carry at lower interest rates than personal loans. the The latest Federal Reserve Bank poll commercial bank rates in the second quarter of 2017 show how big the gap can be:

  • Average 60 Month APR for Car Loans: 4.24%
  • Average annual rate for personal loans over 24 months: 10.13%

Personal loan rates are 138.92% higher than car loans and the term is less than half. Basically, you would have to pay more than twice as much interest on a personal loan and pay off the loan in less than half the time. It’s just not a good deal for car buyers.

3. Consolidating Smaller Debts

One of the most famous Uses for personal loans Consolidate or refinance debt. A debt consolidation personal loan can result in easier money management and a lower interest rate, saving you money on interest payments.

However, not everyone is saving Consolidation of credit cards with a personal loan. Or the savings can be so small that the payout is just not worth the effort.

For example, you could rely on the low interest rate the lender is applying. But the rates you qualify for could be significantly higher than the marketed APR (note that lenders say you can get rates “as low” as this). When you consolidate debt with a personal loan, you can add processing fees and other costs to your balance as well.

If you have a smaller credit card balance that you could blow away with a concentrated effort of 12-18 months, a personal loan may not be the best move. Debt consolidation could be too much of an expense for little reward.

Instead of using a personal loan to refinance small debts, consider making a balance transfer using an interest-free credit card. You can also increase your payments and withdraw the balance without moving it to another loan or credit card.

4. Pay for a vacation

Most people are too willing to borrow to finance their getaways, according to a recent one Survey by the financial planning company LearnVest. Three in four Americans (74%) say they went into debt to finance a vacation and borrow an average of $ 1,108.

Here’s the thing: vacations are unnecessary purchases that you can save and plan for. Taking out a personal loan or paying for vacation expenses with a credit card is a red flag that you are buying something you cannot afford. Worse, interest charges add to vacation costs. So, by definition, you’re paying more for your trip than it’s worth.

Instead of using a personal loan to pay for a vacation, plan a cheaper trip close to where you live that you can pay for in cash. Or postpone the expensive vacation and plan to save up for it.

5. Coverage of the expected main costs

When faced with an emergency or time-sensitive expense, a personal loan can be an inexpensive way to borrow the money you need.

For example, personal loans are often used to finance a home. Some home repairs, from a leaky roof to a broken stove, cannot be postponed. In these cases, a personal loan can help fund repairs to keep a functioning home when your existing cash doesn’t cover all costs.

But there’s a huge difference between an unexpected output and one you just didn’t plan on. The remodeling of your kitchen can wait, for example. Living with an outdated kitchen for a year or two while saving is worth it to avoid unnecessary debt.

You may also be considering a personal loan to pay for a wedding, moving abroad, starting a family, or some other important life event. Knowing that you want to take these important life steps in the future requires a savings plan – not a personal loan application.

Think twice before getting a personal loan

If you are thinking about taking out a personal loan, make sure that it is promoting a financial goal and that you are not flinching. Calculate your personal loan payments to make sure you can fit them into your budget.

Finally, if instead of taking out a personal loan, if you can wait and save to buy, go for it. Keep an eye on your finances and you can set today’s money priorities to match your long-term goals. With some proper planning, budgeting, and saving, you can prepare for a debt-free future and lasting prosperity.

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