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When Is It a Good Idea To Take Out a Personal Loan?

by Nadine Westwood

While it flies against the conventional wisdom of personal finance management, it makes perfect sense to take out a personal loan for certain scenarios and use cases.

Often disliked for its high-interest rates, shorter payback periods, and the damage it does to individual credit scores, a personal loan for a discerning consumer with strong financial principles, stands to add substantial value in the long run.

In this article, we provide a detailed exploration of these scenarios, helping individuals make informed choices about when to opt for a personal loan.

Debt Consolidation

One of the most popular use cases for a personal loan is debt consolidation, that is to say, using one loan to pay off multiple high-interest debts.

If you find yourself straddled with multiple debts, such as credit card balances, payday loans, medical bills, etc, all of which tend to have a higher rate of interest compared to personal loans, it makes great sense to consolidate all of them with one particular loan.

There are, in fact, certain classes of personal loans, dubbed as credit card consolidation loans, particularly aimed at helping you reduce your monthly payments.

Emergency Expenses

Given the unpredictability of life, the unyielding tenets of personal finance cannot always be adhered to, especially in the face of emergencies.

When dealing with a medical emergency that cannot be put off till you can arrange the necessary finances, a high-interest personal loan is perfectly worth it. This also holds in the case of house and car repairs, where you might end up spending more by not getting them repaired, than you would on fees and interest on a loan.

Personal loans have a much quicker approval process than other financing options, and offer a lower rate of interest than credit cards and payday loans, making them ideal during an emergency.

Small Business Financing

Most entrepreneurs and small business owners are faced with a dearth of financing options during the early stages of their business. When a business is yet to generate revenues or establish a track record of any kind, a personal loan, based on the credit history of its owner is much easier to get, and is frankly one of the best short-term sources of financing.

This, of course, is a double-edged sword, the rate of returns generated by a business can exceed the rate of interest many times over, leading to financial freedom for the borrower, or the business can end up in failure, trapping the borrower in a debt trap.

Special Events Or Celebrations

We are now treading a very thin line between fiscal prudence and reckless spending, but certain once-in-a-lifetime events warrant an exemption. When it comes to events like weddings, or when you’re proposing to a loved one, it makes sense to go the extra mile, even if you have to take out a personal loan for it.

After all, in the end, you won’t be counting how much you’ve saved, but the cherished memories that have made your life worth it.

Here again, however, make sure not to go off the deep end, nuking years of savings and personal finance efforts. Make it a point to hunt for discounts and deals, while avoiding frivolous expenses as much as possible.

Down Payment On A House

When you’re all set to buy a house, but fall short on the down payment and other closing fees to a little extent, a personal loan is perfect for bridging the gap.

Lots of home buyers do pursue this option, but it is worth noting that personal loan repayments don’t accrue any tax benefits, and have a much short repayment period, which means, it is likely to eat up a significant portion of your income, almost as much as your mortgage itself in some cases.

This is just straightforward leverage, that is, you are borrowing money to invest, and as is the case with all types of leverage, it is a double-edged sword. If your house has a higher growth rate than your APR, you stand to gain big, similarly, any downtrend in the market can hurt your finances.

Wrapping Up

A personal loan can be a wise financial decision in specific circumstances and can help individuals in several ways that can fundamentally enhance their financial situation. This, of course, depends on its responsible use and prudent financial management to maximize the returns from this quick, yet fickle source of liquidity.

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