This post is from our regular contributor, Erin.
Have you ever considered getting a personal loan to go on vacation, fund part of your wedding, or to help with a home improvement project?
How about to refinance your debt, or to consolidate it?
These are all common uses for personal loans. Really, you can use any reason to take out a personal loan. That’s why they’re personal!
Online lenders have been popping up like crazy the past several years, and if you have great credit, personal loans can be an affordable option if you’re in need of extra cash.
However, it’s important to remember that personal loans are still a form of debt. Regardless of the great interest rates some lenders can provide, it’s always worthwhile to see what you can do before turning to a personal loan.
For that reason, I wanted to cover a few moves you can make before taking a personal loan, and under what circumstances you might want to consider one.
1) Think About the Future and Make Plans
Most of the time, people are using personal loans for things they could have (and should have) easily planned for.
Weddings don’t just happen – they’re planned. Same with home improvement projects (such as upgrades or making your home more energy efficient), vacations, and other major purchases.
Any large purchase should be properly planned for. You shouldn’t be buying an engagement ring or a house on a whim!
If you think these expenses are sneaking up on you because you haven’t thought them out, then maybe it’s time to sit down and review what your financial goals are.
Think long and hard about what the future might hold. If you’ve been with someone for a couple of years, do you think marriage might be on the horizon? Getting the itch to travel and want to take a much-needed vacation? Worried your home might need a few repairs within the next few years?
Make a list of all the possibilities. Preparation is one of the many keys of financial success, and by preparing, you can start saving for these goals, rather than having to turn to a personal loan to fund them.
Speaking of…
2) Turn Saving Into a Habit
Once you’ve made a list of your goals, it only makes sense to plan out how you’ll save for them.
I’m going to go out on a limb and say most people who turn to personal loans don’t have much saved up. If they did, there wouldn’t be much of a need for them!
Maybe you didn’t think saving was important because you didn’t realize how many financial goals you had. Planning can go a long way in putting your goals in perspective.
Either way, now is the time to start figuring out your plan of attack when it comes to funding your goals.
If you’re new to saving, the best thing you can do is set up automatic transfers from your checking to your savings account.
Automating your savings means you don’t have to think about it – the habit is developed for you! Plus, the money will be earmarked for saving, lessening the likelihood you’ll go and spend it.
If you’re easily tempted to spend, keep your financial goals in mind at all times. This will help you turn saving into a habit.
Have reminders of your goals everywhere in the form of a sticky note or picture. Place them on your desk at work, on the refrigerator at home, or wrap them around your cash, debit card, or credit card. Create an image and make it the wallpaper on your computer and phone.
You’ll find yourself wanting to save for your goals rather than spend the money elsewhere. You might need the extra motivation to keep moving in the right direction!
3) Consider Delayed Gratification
I get that in some cases, you might not want to wait. Saving can take a while, especially if you’re working with a low income, or if you have debt.
That makes personal loans look rather tempting, right? Most lenders like to emphasize how fast their funding process is.
Don’t be fooled, though. Taking a personal loan out means having debt. It means paying interest, which means you’ll pay more than the original loan amount that’s disbursed to you. On top of that, it can also mean origination fees, making the loan more expensive.
Is what you’re using the money for worth all of that? Is it that urgent?
In some cases, it might be. But in most situations, you’re better off waiting.
For example, I’m not willing to go into debt to afford a wedding. One day isn’t worth it to me, so I’m taking my time and saving up for it. I’d also rather not start married life off with a bunch of debt to worry about.
I know – marriage is a huge deal, and some people don’t want to delay that special event. All I’m asking is that you think about it.
What about a vacation? Is there any way to save for a smaller vacation to satisfy the itch you’re feeling in the short-term, while saving for a bigger trip down the road? Do you want to come back from your vacation worried about how you’re going to pay the bills?
Weigh your options carefully and make sure taking out a personal loan and incurring debt is absolutely worth what you’re using the money for. Making financially responsible decisions is half the battle.
When You Should Consider a Personal Loan
If an emergency happens and your emergency fund isn’t large enough to cover it, you might be better off going with a personal loan over charging it. Many lenders are offering competitive interest rates – much less than the typical credit card APR.
However, if the amount is small enough that you can pay it off in full before your next billing cycle, then charge it as opposed to going through the loan process.
If you have high interest rate debt that you’d like to refinance or consolidate, personal loans can also be a good option. Again, if you have good credit, you’ll often be able to save money by getting a lower interest rate.
Just remember to be responsible and make timely payments. Don’t take out a personal loan if you won’t be able to afford the monthly payments. Lenders will give you the details of the loan before you make any commitments so you can review them before accepting.
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The need for most personal loans can be avoided with a little planning, saving, prioritizing, and waiting. Be realistic about your future needs and take appropriate preventative measures before the need arises!
Have you ever taken out a personal loan before? Why? What advice would you give to people applying for a personal loan?
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“…think about the future and make plans…” Couldn’t agree more Erin! Several years ago we knew that we’d soon be outgrowing our minivan. Plus it would be 10 years old with almost 200k miles. We started then to save for a new-to-us car and just last month we had enough to pay for a used Suburban with cash.
The closest thing we’ve ever taken to a personal loan was several car loans. In the first instance we put no thought into it and just financed the entire car and the second we put a significant amount down and ended up paying it off about 18 months early. For any future purchases, we’ll be planning on doing all cash. Regardless, in the overwhelming majority of the cases, it comes down to planning and being aware of what you’ll need. It’s not always easy to do or plan out, but definitely possible.
I’ve never taken out a personal loan and I hope I never have to. I understand emergencies happen and it might be a last resort one day, but for planned expenses I’d rather just save up and plan properly for them to avoid having to take out a loan. Thanks for the helpful tips!
I’ve never taken out a personal loan but would consider that an option (where I get my car loan) if I really, really had to instead of cc debt because of the interest rate. Fingers crossed that never happens! :)
I’ve never taken a personal loan and hopefully won’t have to take one. My co-workers do this often and if I could give advice (I try not to), it would be not to. It’s one thing if you’re taking a loan to pay for school, a house, maybe…maybe a car (if you really NEED it to get to work), but a loan for a vacation and other non-essential things. I’d say no. If you can’t afford it, then save for it.
I love me some leverage for investments :-) I’ve always, always had access to credit. It’s much better to ensure that you have it before you need it (and not use it just because you have it, obviously).
I like point 3- Delayed gratification. A lot of times, you can move forward in life without moving forward with a specific purchase. I mean, you can buy a crap car for 1K while you save 4-5K for a better one.
On the wedding example, I have several friends who got married with a very small simple ceremony. No dress, pawn shop rings, etc- this is a totally viable option if you want to get married sooner than you can afford the wedding.
I was also recently invited to the anniversary ceremony of a couple that’s been married five years and have two kids. They did a courthouse wedding, but she had always dreamed of the whole princess wedding thing. I’m so excited that they’re getting to celebrate their marriage this way.
Brian @ Luke1428 Nice job, Brian! It’s true, we can estimate when we’ll need to make big purchases, especially when it comes to cars.
FrugalRules I think cars are a pretty popular option – I know my parents both took out personal loans to finance theirs. You’re right that planning isn’t *always* possible (especially when your car gets totaled in an accident and you just paid to have it repaired the day before…that happened), but we should always be trying to anticipate our needs.
Chonce I agree, Chonce! I’d much rather leave it as a last resort.
Beachbudget I’m with you there! The lower interest rates are the only attractive thing about them.
Andrew LivingRichCheaply I can’t imagine taking out personal loans on a regular basis, yikes! I’m not a fan of how personal loan lenders mention flashy things like vacations and new cars as a reason to take on debt. As you said, it’s a waste for non-essential things.
moneypropeller That’s a good point, Anne!
Hannah UnplannedFinance Thanks for sharing those examples, Hannah. I’m all for simple celebrations, but it’s nice that your friends are having an anniversary ceremony! That’s a good way to go about it.
I agree that most things can be planned for. I have an emergency account and a trip account that I deposit money into each month. I took out a personal loan from my credit union a couple years ago. The interest rates are very low, but it’s still a form of debt. I will pay it off before the summer is over.
I definitely think all of these are better moves than a personal loan, but if you are really strapped, I would say to ask your family if at all possible. I have a client who got into some pretty bad debt trouble and fortunately she negotiated a loan from her parents which she pays back with interest now, but not as bad as the interest on a personal loan.
Jason @ The Butler Journal Credit unions are definitely the way to go if absolutely necessary. As you said, the interest rates are typically pretty low!
blonde_finance That’s true – I’d hope most family members would be willing to offer a lower interest rate. Those arrangements can be tricky to navigate, but it works for some people, and it’s better than dealing with credit checks and fees.
The only time I’d take a personal loan is if my lights were about to be turned off, although if you could get a fixed low rate, it might not be bad for debt repayment. I don’t think people should ever go into debt for vacations, weddings, or events. The only debt I’m willing to take on at this point is debt that earns money, like for real estate.
Eyesonthedollar They are an okay alternative for those in consumer debt looking to refinance or consolidate, but I agree – vacations, weddings, and events are a no-no. Debt that earns money isn’t a bad idea as long as the investment is researched beforehand, of course. =)
I really dislike those ads that make it seem like taking a personal loan for a vacation, etc is a good idea. It’s understandably a tempting idea, but as much as I love to travel, it is also not a necessity. I can save for it. It’s unfortunate because so many people buy into what those ads are selling and don’t understand how much more they are actually paying for the things they want.
My bank makes getting a personal loan waaaaaay to easy. They call them selfie loans…..and I get mailings for them all. the. time. They give you a pre-approved amount….and when they say pre-approved, this is no generic pre-screening process, you are actually pre-approved. If I would call up and say i got the mailing and want the loan, I’d have the money within hours.
ShannonRyan I agree, it’s not very responsible of them, but of course, they’re out to make money on people. Far too many don’t realize the implications interest has!
DebtChronicles Selfie loans?! Oh wow. That’s awful. I can only imagine how many people they’ve gotten with that. Personal loans (or any loan) should not be a walk in the park to get.
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