In this time of economic uncertainty, you may be asking yourself: should I take out a personal loan? Perhaps you have lost a job due to the recent pandemic, or you are looking to consolidate some of your debt.
Whatever the reason, there many things to consider before taking out a personal loan.
How Do Personal Loans Work
Personal loans are credit provided to you in the form of payment. It is paid off in installments that can run from 1 year or more.
This credit is fixed to a contract to pay back the loan with interest. Depending on your credit history or the type of loan you take out these interest percentages can vary. Your goal is to choose a plan with low-interest rates and low loan fees. The average personal loan interest rates are between 10% to 28%.
Should I Take Out A Personal Loan: Good Time vs. Bad Time
With any economic decision to borrow comes certain risks. If you are considering taking out a personal ask yourself: is this a good time or a bad time to borrow?
Here are some cases when it may be a good time to borrow:
Consolidating High-Interest Debt – perhaps your credit score has increased due to good payment history or amount of credit history.
It may be a good time to consolidate your high-interest debt with a low-interest loan.
Home Improvement – borrowing to make home improvements on your house is a good time to borrow.
The money borrowed will increase the equity of your home giving you money back on your loan whenever you decide to sell your home in the future.
If this sounds like you, consider using a trusted company like Loanpal. It is estimated that the rise of financial technology firms are a service utilized more than traditional banks these days.
Here are some reasons why it may be a bad time to borrow:
Paying Back Discretionary Spending – using a personal loan to pay back frivolous expenses in your past or to afford something in the future, like an exotic vacation or luxuries for your home is NOT a good time to use a personal loan.
Living Expenses – taking out a personal loan to pay for living expenses like rent, mortgage, car payments, or any other expense in the short-term is not considered wise.
This is because all of your living expenses in the short term will be applied with interest, and your bills will still keep coming each month along with your loan bill.
Applying a Long-Term Approach
Taking out a personal loan can be a sound investment for your overall credit score if you are borrowing for the right reasons.
As discussed above, paying down high-interest debt and borrowing for home improvements can boost your credit score in the long-term with good payment history on your loan.
It is important to never borrow to pay off old luxuries or new desires or to keep yourself afloat financially. These are short-term financial transactions with long-standing effects on your overall credit score.
The point is to be smart when borrowing and consider the long-term.
For more information like this check out some of our other articles and check back frequently for more information.