Personal Loans

Are Personal Loans Bad?

Personal loans can be bad if they are taken out by the wrong borrower or for the wrong reasons. Here are five good personal loans and three bad ones.
Young couple applying for a personal loan online
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By Gina Freeman
Updated on: July 28th, 2021

If you’re wondering, “Are personal loans bad?” ask yourself, “Is money bad?” The personal loan, like money, is a tool. If it’s put to good use, it’s good. If it’s used poorly, it can indeed be bad.

Used correctly, personal loans solve problems or help you take advantage of opportunities. Here are five popular good uses for personal loans.

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Travel Loans: More Trip for Less Money

Booking and paying for travel in advance can create huge savings. It’s common for cruise and travel companies to offer 50% discounts if you book your vacation and pay for it a year ahead. But what if it takes you a year to save up for your vacation? You’ll have to wait two years to take your trip if you want that 50% discount.

A personal loan solves the problem. Book your trip now and pay for it with a 12-month personal loan. Then, spend the next year paying it off. You’ll get a two-for-one vacation without the long wait. And you won’t be paying for your vacation for years after it’s over.

Debt Consolidation Loans: Reduce Your Rate

Debt consolidation is a popular use for personal loans. The average interest rate for personal loans is 9.41%, according to FICO. In comparison, the average credit card interest rate runs between 15.56% and 22.87% (depending on the type of card). You can probably save money by replacing credit card balances with a personal loan.

These fast loans can make getting out of debt easier, too. They are not revolving accounts like credit cards. You borrow a lump sum, make regular payments during the loan’s term, and zero out your balance by the end. As long as you make your payments, you know when you’ll be debt-free and what it will cost. Personal loan interest rates are usually fixed, so budgeting your payment is easier.

Business Loans: Finance Your Startup

Loans from the Small Business Administration (SBA) are notoriously difficult to get and famous for taking forever to fund. Fast online loans from personal loan vendors offer a speedy alternative. And if your credit is excellent, they can be cheaper than SBA loans.

You can borrow a lump sum to purchase equipment and inventory and rent office space. But personal loans can also be lines of credit to cover payroll and pay suppliers when cash flow is glitchy. Business personal loans can be secured by your business assets or unsecured.

Tiny Houses: Tiny Loans

Many of those who have joined the tiny house movement did so to save money. The low cost of tiny living can help people boost their retirement savings, get out from under debt, or allow them more free time. But tiny homes, while much cheaper than traditional houses, still run to five or even six figures. And mortgage lenders do not finance tiny houses because they are not classified as real estate.

You can finance a tiny home with a personal loan in less time than it would take you to get a mortgage because lenders don’t require appraisals for unsecured loans. However, you may be able to pay a lower interest rate with a secured personal loan. If your credit is excellent, your tiny home interest rate won’t be much higher than that of a traditional mortgage. And you won’t have the huge upfront costs that mortgage lenders charge to cover their processing costs.

Medical Loans: Your Money or Your Life

Medical procedures can be costly, even with an insurer picking up 80% of the cost. And unless your ailment is a life-or-death emergency, you don’t get your surgery unless you pay for your surgery. That’s a problem because not only won’t your condition improve while you save money for a procedure, it can easily get worse. At best, you’re living in discomfort while you save up for care. At worst, your health worsens from the delay.

Medical loans are unsecured personal loans that take just days to fund. When your health is at stake, these fast loans can literally be lifesavers. It’s hard to put a price on that.

When Personal Loans Aren’t Good

Personal loans are good, but can backfire in some instances, including the following examples:

  • Long-term loans should only finance long-term assets. Don’t take a five-year loan to finance a two-week vacation.
  • Debt consolidation loans can backfire if you run up your credit cards back up while still paying off your personal loan.
  • Personal loans for poor credit with extreme terms can suck you into an unending cycle of debt and credit problems.

Sometimes a personal loan isn’t your best option. Secured loans like home equity financing can be cheaper, especially for substantial amounts. And debt management plans from credit counselors can help you get out from under debt instead of burying you.

 

About the Author

Gina Freeman writes about personal finance and has been featured on AmOne.com, The Mortgage Reports, MSNMoney, Fox Business, Forbes, The Motley Fool, and other fine websites. Her background includes tax accounting with Deloitte, over 20 years in mortgage sales and underwriting, systems consulting for Experian, and several years in bankruptcy law. Gina enjoys helping consumers make confident and intelligent financial decisions.