Personal loans are a very flexible borrowing tool, but here’s why you may want to avoid one.
When you need money in no time and don’t have enough savings, you may be thinking of a personal loan. A personal loan You can borrow money for any reason, be it to go on vacation, fix up your home, or deal with a sudden flood of medical bills.
But personal loans are not for everyone. Here are a few reasons you might not want to have one – and explore other loan options instead.
1. You don’t want to borrow that much money
When you take out a personal loan, there is generally a minimum amount to borrow, so if you only need a modest loan that may not work. Let’s say you need $ 500 in a pinch. Many personal loans have a minimum of $ 2,000 or more, and the last thing you want is to borrow more than is necessary because of those rules. That said, you may be able to get one right now loan against coronavirus, so that you can borrow a smaller amount than with a regular personal loan.
2. Your need for money is only temporary
You may need money in the short term to get you through a short period of financial shakiness, or to cover an expense that you know you will pay back quickly. Suppose you are on leave from work, but your employer says you will be back full-time in two months. Or maybe you have to pay for a vacation, but you get a massive bonus for a job well done next month. In these cases, a credit card with an introductory rate of 0% might be a better option for you. If you can pay off your balance within that intro period, you will not accrue interest on it at all. But with a personal loan, you shall get stuck paying interest.
Ascent’s selection of the best personal loans
Looking for a personal loan but not sure where to start? The Ascent’s selection of the best personal loans will help you demystify the offers out there so you can choose the best one for your needs.
3. You have a home with sufficient equity capital to borrow against
If you own a home with equity, you may be able to borrow it cheaper than with a personal loan. (Equity is the difference between what your home is worth and what you owe on your mortgage – the portion of your home’s value that you actually own.)
Home Equity Loans and HELOCs (home equity lines of credit) generally have lower interest rates than personal loans, and they are fairly easy to qualify because your home is used as collateral. For example, if you have a lot of home equity and bad credit, you can still get good interest if you borrow against your home as your property itself is used as collateral to secure your loan. On the other hand, most personal loans are unsecured, so you can get stuck with a higher interest rate on one of those loans if you have bad credit.
The great thing about personal loans is that they are very flexible – you can take out one for any reason. But before you rush to apply for a personal loan, make sure it is right for you. You may want or need to go a different route, depending on your circumstances and the other options available.