Getting a personal loan can be a smart decision in some circ*mstances.
Personal loans can have lower interest rates than credit cards. In fact, as of February 2023, the average credit card interest rate was 20.09% and the average personal loan interest rate was 11.48% for a 24-month personal loan, according to the Federal Reserve. With a fixed payoff schedule, personal loans also have a set monthly payment (as long as you choose a fixed-rate loan) and the total costs are set over time.
But, while personal loans may be a pretty good way to borrow money, that doesn't mean you should just take out a loan without thinking it through. In fact, there are some very bad reasons to take out a personal loan -- including these two scenarios in which you might want to think twice about borrowing.
To fund a lifestyle you can't afford
The absolute worst reason to get a personal loan is to fund a lifestyle that is above your means. If you are consistently spending more money than you earn, it is going to be impossible for you to ever catch up -- let alone get ahead and save money for your future.
You should aim to keep your housing and other fixed expenses to about 50% of your income, save around 20%, and spend the remaining 30%. But, even if you can't stick to these ratios, you do not want to regularly spend more money than you are bringing in. This is true regardless of what you are spending it on, whether it's a house you can't really afford to live in or dining out or groceries that are too expensive.
If you can't cover your costs of living and need to get a personal loan to make ends meet, you should make some drastic changes as soon as possible. This may mean moving or getting a second job temporarily until you can find a way to increase your primary income or cut your expenses substantially
Otherwise, if you are using a personal loan to try to help you continue funding a lifestyle that is beyond your reach, you'll only compound your problems. You'll be adding your monthly personal loan payment to your obligations, which will leave you even less to live on going forward.
To buy something you don't really need
It's also a bad idea to get a personal loan for any type of unnecessary purchase. That's because you will be making that purchase more expensive with your personal loan and will also be giving up future income you haven't yet earned to make payments to creditors -- sometimes for years.
The more of your money you commit to a creditor, the less there is to do other important things with -- like saving for retirement or for other important financial goals. Before you take out a personal loan for an unnecessary purchase, ask yourself whether you're really okay with giving up your future freedom to spend your money the way you like.
In both of these situations, your personal loan is likely to hurt you rather than help you. Just say no to borrowing under these circ*mstances.
Our picks for the best personal loans
Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing our picks for the best personal loans.
