Are Personal Loans a Bad Idea?

housewife researching whether personal loans are a bad idea

Lenders offer personal loans as a handy way to finance major purchases or fund travel, pay for weddings, or cover unexpected medical expenses. If not handled carefully, personal loan debt can quickly build up, damaging your credit. But, if used responsibly, they also offer a relatively easy way to improve your credit score! 

So are personal loans a bad idea? Let’s take a look at how they work.

What Are Personal Loans?

Personal loans are fixed or adjustable-rate loans offered by banks and credit unions and are commonly used to fund large purchases, cover unexpected expenses, or consolidate debt. Unlike home or auto loans, personal loans are unsecured. Qualifying buyers are paid a single lump sum that must be repaid in installments over terms from a few months to several years.

What Are the Risks of Taking a Personal Loan?

Personal loans generally have rates lower than credit cards but higher than secured loans such as home equity lines of credit or auto loans. Borrowers can incur additional fees if they do not repay on time and risk having their unpaid loan handed over to a collection agency that will charge high rates until the loan is paid off.

Late payments or defaults or an excessive balance on a personal loan can negatively affect your credit score.

Being Smart About Personal Debt

At the same time, personal loans also offer a way to improve your credit score — if used responsibly.

If you are planning to borrow money for a major investment — such as a car or home — you may find that your credit score is being lowered because your credit utilization is too high. Usually, this means you already have too much outstanding debt relative to your salary, even if you can repay it all on time. Often this takes the form of credit card debt.

Personal loans offer a relatively easy way to consolidate debt using a single lump payout.  While you will still need to pass a credit check and your interest rate may be higher because of your existing debts, you will still qualify for a rate well below credit card interest and without the risk of borrowing against your boat, car, or another secured asset.

And, with your debts consolidated in one place at a lower rate, your credit utilization rate is set to improve, too. It all comes down to being responsible about your borrowing.

Managing a Personal Loan Responsibly

Here are some ways to make sure you manage your loan responsibly so you can reap the benefits of consolidating your other loans while minimizing the risk of further damage to your credit score.

Make a Budget

Before you take on a new personal loan, determine how much you can afford to pay each month for the full term of the loan. While more is better, you need to be able to pay consistently. While the rates might be lower and the terms more flexible, paying down this loan is now just as important as the credit card debts or even payday loans you may have rolled into it.

Understand the Terms and Conditions

Read the fine print. Make sure you understand the consequences both of missing a payment but also of prepayment fees. Be aware of how interest is charged, as this may differ from the annual percentage rate you were quoted. Be aware of any processing or computation fees.

Know How Long You Have to Pay Off Your Loan

A shorter-loan term will mean higher payments, but a longer-term loan will mean more interest charges. Be realistic about what you can afford, both today and in the coming months, and plan your other spending accordingly. You may have to skip a vacation next summer, but you will gain in the long term.

Know When Your Payment Is Due

It sounds obvious, but plan your monthly expenses so you are not caught short. Plan to make your loan payment as soon after receiving your salary as possible. Some lenders will even charge late if your payment is a few days late without reporting a missed payment.

Communicate With Your Lender

If things do not go according to plan and you cannot make a payment, do not take on additional debt or try to avoid your lender. Reach out and explain the situation. It may be embarrassing, but most lenders will be prepared to work with you to some degree.

Pay Off in Advance

If you come into extra money over the loan term, use it to pay the loan off early. You will save on interest payments and you will free up your money sooner to use on things that matter to you. But keep an eye out for prepayment penalties.

Stay on Course

This loan is essential to your long-term future. Do not be tempted to put additional items on your credit card because you are making progress on your existing debts or take out another personal loan on the same terms. The idea is to reduce debt utilization long term so you can borrow smart on things that matter.

Are Personal Loans Bad? Let Baton Rouge Telco Help Make Personal Loans Work for You

At Baton Rouge Telco, we offer our members affordable personal loans to help you finance your needs today and build toward a better tomorrow.

We offer a range of loans, all with simple, flexible terms and low rates, including:

  1. Personal loans
  2. Secured personal loans
  3. Emergency personal loans

Click below to learn more about our personal loans.

Personal Loans

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