Financial advisors generally tell you to avoid getting personal loans. Those financial advisors are usually right, but there are some situations in which obtaining a personal loan may be a good idea. Below are a few situations in which getting a personal loan may be a good idea.
- Need immediate funding – If you have to have immediate funding, for whatever reason, obtaining a personal loan can get you access to cash quickly, sometimes the same day.
- Consolidating credit card debt – If you have a lot of credit card debt, at a high interest rate, a personal loan may be more appealing as it will offer you a lower monthly payment and a lower interest rate.
- Refinance student loans – Some student loans carry very high interest rates. Your student loan interest rate may be higher than a personal loan. If you are able to get a personal loan with a lower interest rate, it will lower your monthly payment and you will pay less interest over the long-term. One important thing to note before you go down this path is student loans come with tax advantages so make sure you include that in your calculations.
- Improve your credit – If you are trying to improve your credit score, a personal loan might help you. If your credit report shows mostly credit card debt, a personal loan will help your account mix. If you have different types of loans on your report, it usually helps you improve your credit score. It will also lower your credit utilization ratio, which is the amount of total credit you are using compared to your total credit limit. Obtaining a personal loan will increase the total credit amount available to you. Lastly, if you continually pay down the personal loan your history will also help you improve your credit score.
- Starting a business – This is on the riskier side, but if you have a great idea and you do not have other funding options, a personal loan is a potential option. A personal loan is easier to acquire and has less stringent requirements compared to a business loan. Taking out debt to create a start-up business comes with obvious risks, but if you have done your diligence and believe in yourself, financing the business should not stop you.
These are a few reasons to potentially get a personal loan. Remember that a loan is typically for something you definitely need and should not be used for discretionary spending. Personal loan interest is also typically high, so make sure the loan is worth the cost.