Personal loans allow you to borrow for any purpose, but is that a good thing?
It’s kind of a blessing/curse situation.
- Personal loan proceeds can be spent as you see fit.
- While it’s nice to have this flexibility, it could lead to you borrowing money for the wrong reasons.
When you sign a mortgage, you are required to use the proceeds of your loan to finance the purchase of a home. And when you take out an auto loan, you have to use that money to finance the purchase of a vehicle.
Personal loans are much more flexible. With a personal loan, you can borrow money for any purpose.
Do you want to furnish your new apartment? A personal loan could make this possible. Need to repair your car? You can take out a personal loan and use that money to pay for new tires, brakes, or a working transmission.
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But while the flexibility of personal loans is a good thing for borrowers, it also has a major downside. And that’s something to keep in mind if you’re considering getting a personal loan.
You shouldn’t borrow for an old reason
You can technically take out a personal loan and use the money to buy crates on junk food crates. But that doesn’t sound like the best idea, does it? Well, in that sense, it’s really not a good idea to use the proceeds of a personal loan to pay for a non-essential expense.
So, let’s say you’re looking forward to taking a vacation because it’s been several months since you escaped from your current city. While a vacation can do wonders for your mental health, it’s not a necessity. And if you don’t have the cash to pay for your vacation, then you better put those plans on hold, save up and then hit the road instead of taking out a personal loan to speed up your trip.
Likewise, if you recently got your own living space, you need some basics like a bed, kitchen table, and chairs right away. Operating without these key elements is not really reasonable, and therefore taking out a personal loan to pay for these purchases is not such a bad choice.
But that doesn’t mean you should take out a personal loan and use the money to buy designer side tables or furniture for your guest room. Instead, save up for furniture you don’t need right away (and besides, there’s nothing wrong with having guests sleep over your old futon for a few months).
Personal loans tend to charge less interest than other borrowing options, such as credit cards. But that doesn’t mean you should go into debt of this nature without thinking about the consequences.
In the end, a personal loan is still a loan. This means you’ll pay interest on the money you borrow and also risk ruining your credit score if you fall behind on your loan. And once your credit score drops, it can become difficult to borrow in an emergency.
If you are in urgent need of money, for example to repair a car that is not running, then do not hesitate to obtain a personal loan and repair. But be extra careful when taking out a personal loan so you can indulge in something you really should be saving up for instead.
The Ascent’s Best Personal Loans for 2022
Our team of independent experts have pored over the fine print to find the select personal loans that offer competitive rates and low fees. Start by reviewing The Ascent’s best personal loans for 2022.