Personal loans are handy in a number of scenarios, giving you a way to get access to a sizable slice of cash which you can then repay over time.
Of course, not everyone should apply for a loan, and it’s best to consider your needs and circumstances before you pull the trigger.
With that in mind, let’s go over situations where taking out a personal loan makes sense and examples of why it might be wiser to hold fire.
Take out a loan to consolidate existing debts and lower your payments
If you are already staring down the barrel of significant debts that are unsustainable because of the interest rates applied to them, using a personal loan calculator is a quick and easy way to check if it would be more affordable to consolidate everything you owe under one borrowing package.
Debt consolidation is recommended for all manner of people, especially those with high-interest debt like that associated with credit cards. A personal loan decreases interest and gives you a finish line, at which point you will pay off what you owe.
Take out a loan to finance large purchases
Another excellent reason to find an affordable personal loan product is if you want to make a big ticket purchase without wiping out your savings in one fell swoop.
For example, when buying a car, you can get a loan to cover the asking price, preserving your nest egg and spreading the repayments out over a longer period.
Take out a loan to pay for home improvements
Personal loans make a lot of sense as a means of funding remodelling work in a property you own because this type of work tends to add value to your home.
As such, it’s easier to justify whatever interest you’ll pay on the loan over the repayment period because this will be absorbed in the price increase experienced by your property.
Think twice if your budget isn’t in order
Personal loans require regular monthly payments to maintain, so you have to check that your budget has got room to accommodate these additional outgoings on top of all the other expenses you face.
If loan repayments leave you substantially worse off, with no disposable income, or even with a budget deficit, then it won’t be wise to take on this debt.
Think twice if your credit score is low
Another issue to encompass when searching for personal loan products is your credit score. Even if a lender advertises low rates, you might find that a poor credit history leaves you without access to the best deals.
In this case, it is better to improve your credit score by doing things like paying down existing debts and only applying for loans when it has risen substantially.
Think twice if the loan is intended for something extravagant
We all love to treat ourselves, but taking out a personal loan isn’t the best way to go about this. It’s more financially responsible to set a savings goal and work towards it month by month rather than cutting corners with a personal loan and then paying the price in steep interest rates.
You’ll develop more responsible money management habits if you delay the gratification of making an extravagant purchase through saving, and you might even find that when the time comes to cough up the hard-earned cash, you no longer have the impulse to buy anything.