You can agree or disagree, but many people believe that your finances revolve around your credit score. If anything dares to mess around with it, you’re in for a turbulent financial period. This includes a damaged score, higher interests, and fees. A worst-case scenario could see you plunged into bankruptcy.
This is why you need to tread with caution when applying for a personal loan. You need to analyze whether the loan will benefit you, or it will set you down a darker path. The economy is enjoying good times and this is part of the reason why the appetite for loaning money is growing.
However, with such a growing appetite comes irresponsible borrowing and lending, which can lead to financial problems in the future.
In this article, you’ll find out ways a personal loan can damage your finances.
A Personal Loan as an Added Expense
If you have outstanding debts (including credit cards, a mortgage, and student loans, among others), adding a personal loan to the list will sink your ship.
If you can’t handle your current expenses, chances are you’ll sink faster by adding another monthly payment. In addition, your credit score will take a nose dive due to increased debt.
Therefore, it’s important to analyze your financial situation before taking out a personal loan. Try and trim your spending to allow your finances to recover. You can also consider using your credit card. With it, you can keep an eye on the credit utilization ratio, which is 30 percent or less of the entire credit limit.
If you come across a chance to increase your credit limit, go for it. Personal loans don’t have this option; therefore, they don’t contribute to your utilization ratio.
Taking Out a Loan for a Vacation
Taking out a loan to finance a vacation will create serious dents in your pockets. While it may seem harmless to take a loan to go on vacation to the sandy beaches of Seychelles, the aftermath of monthly installments for the next four to five years will turn your finances around.
If you’re looking to go on vacation, save up for it and pay cash. The same goes for household furniture. Figure out the amount of money needed to buy what you want and save toward it. Besides, paying cash for the items you want is much more joyous.
Refinancing a Small Debt
Many people use personal loans to consolidate cash or payday loans with higher rates in order to get better repayment terms. However, this will work best if you have a huge debts and a longer repayment period to clear the loan.
On the other hand, if you have a small debt with a shorter repayment period, you might want to opt for a balance transfer card. With this card, you’ll benefit from zero APR on all balance transfers up to 21 months.
Other cards offer zero transfer fees, which will help you clear the outstanding loan without incurring extra costs.
Remodeling Your Home
A personal loan is an unsecured loan. It means you have no collateral attached to the loan. As a result, lenders offer loans with high-interest rates, thus increasing your monthly burden. In contrast, a home equity loan offers a solution with fixed rates and monthly payments for a set period of time.
However, the biggest advantage of this loan is the security. Your home acts as collateral and lenders love to see collateral because they know they can get back their money in an instant in case you default on payment. This allows you to access loans with reduced interest rates.
You can also consider a home equity line of credit (HELOC). While these loans offer variable rates, they will be lower because, again, your house acts as collateral.
Skipping Monthly Installments
Your payment history is an integral part of your credit score. Lenders split personal loans into monthly installments. Skipping or making late payments will have a significant negative effect on your score. A single late payment can take some points off your score.
Because of this, it may take you months or years to get your score back on track. Therefore, you need to think through whether a personal loan is the best financing option at the moment. Take an objective look at your finances and decide whether the loan is affordable, or you’ll have difficulties meeting the monthly payments.
Funding College Education with a Personal Loan
Borrowing money to fund a college education is acceptable, but not with a personal loan. The best option is a federal student loan to take care of college tuition. These loans offer low fixed interest rates, and they benefit from certain federal protections including forbearance and deferment.