You should get a personal loan if you really need to borrow the money and the loan has better terms than other borrowing methods available to you. For example, in certain situations, a credit card or home equity loan might be a better choice. In addition, you should only get a personal loan if you are confident that you can pay the loan off on schedule. Borrowers have defaulted on 3% - 4% of personal loans since 2016, down from 4.8% a decade prior, according to TransUnion. Defaulting on a loan results in significant credit-score damage.
If you’re on the fence about whether you should get a personal loan, you can follow this simple checklist. You’ll need to check off all the items for a loan to be worthwhile.
When you should get a personal loan:
The expense is necessary. You can get a personal loan for almost any purpose. But it’s wiser to use a loan for important things like consolidating debt or making home improvements that will increase the value of your property.
Credit cards aren’t a better option. People with good or excellent credit will likely find better long-term interest rates on personal loans than on credit cards. But there are plenty of credit cards with introductory 0% rates for 12-18 months on purchases. So 0% APR credit cards may be the better choice for smaller expenses.
Home equity loans/lines of credit aren’t a better option. You can probably expect to get lower interest rates on a home equity loan or home equity line of credit than with a personal loan, and you may be able to borrow more than you could with a personal loan. But home equity loans and HELOCs use your house as collateral, whereas most personal loans require no collateral. Think over your options in detail before choosing.
You’re confident you can pay it off. Personal loans can last anywhere from 12 to 84 months, though 60 months is a more typical cap. You’ll make payments in equal monthly installments. Before agreeing to a personal loan, look at the monthly payment and put it in the context of all your other monthly expenses. You should be able to comfortably afford the loan payment, and not have to worry about being late.
You can qualify. To get an unsecured personal loan (a loan that doesn’t require collateral) you’ll need a credit score of at least 585. And you probably won’t be able to get a loan without an origination fee unless your score is at least 660.
There are many situations when you should get a personal loan instead of borrowing another way. But there are also plenty of cases where you should not get a personal loan or even borrow at all. For example, taking out a personal loan to go on vacation or to throw a wedding isn’t ideal. It’ll take months or years to pay off the debt from something that only lasted a day or week. In addition, you’ll want to avoid personal loans when you can get a better deal through other borrowing methods.
There are several other cases when you should not use a personal loan either. For example, it’s not a good idea to borrow money to make investments you’re not confident will pay off in the future. And your chances of getting an unsecured personal loan aren’t great when your credit score is below 585. Personal loans are also not ideal in emergencies when you need immediate cash, because the lenders usually take at least a few business days to approve you and deliver the money. You might consider using a credit card or borrowing from family in an emergency instead.
Bottom line: Make sure to compare all options thoroughly before you commit to one.
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