I have such a love-hate relationship with credit, as I’m sure most people do. It’s there when you really need it and that means the world, but it’s also there when you really don’t need it, and that can get you into trouble. There are some forms of credit that shouldn’t be messed with, unless you have complete control of the outcome. That outcome being, you can pay the debt off before it starts costing you a lot of money.
This is where personal loans come in – usually, these loans are too big to pay off in one go. That means you are being charged interest each month, until the balance is paid. Obviously, that could be the case with any type of debt. There’s just something about personal loans, though. Today, you’ll learn 5 reasons why personal loans are a bad idea and should be avoided, if possible.
5 Reasons Personal Loans are a Bad Idea
#1 The monthly payment can be high
As I mentioned earlier, personal loans usually come with high balances. The loan amount you are approved for is in the thousands. The higher the loan balance, the higher the monthly payment. A high monthly payment can really mess your budget up. Before proceeding with any personal loan, make sure you can handle the payments each month.
Your budget will let you know if you can afford to make the payments. If things are tight, I’d suggest holding off. Unfortunately, you are one unexpected expense away from not being able to make the payment. All that leads to is late fees and a higher balance due.
#2 Once the loan is paid back, the account is closed
Another reason to hold off on personal loans is because the account automatically closes when the loan is paid off. This messes with your credit history. Average length of credit history makes up 10% of your credit score, so an open and closed personal loan account brings your average down.
If you are going the personal loan route, consider a personal line of credit. These are credit lines that stay open indefinitely. That way, you still get the balance you need, but the account stays open once you pay it off. It can also be used in the future. I’ve had a line of credit through my bank for years. I only use it when I need a large sum of cash. After that, I pay it off. Just like personal loans, the higher the balance, the higher the monthly payment.
#3 The approved loan balance is usually never high enough to cover what you need
Most people take out personal loans to consolidate their debt. The drawback here is that 9 times out of 10, the personal loan balance isn’t high enough to consolidate all of a person’s debt. That means you aren’t consolidating everything. That also means you now have to manage multiple monthly payments.
What makes matters worse is that the personal loan monthly payment is usually high, and you still have to worry about the minimum payments on any other debt that wasn’t consolidating. Again, this could be a recipe for disaster with your budget.
Make sure you are fully aware of what a personal loan does to your budget, combined with any other debt that you are still responsible for. The last thing you need is for the personal loan to bite you in the butt.
#4 Some lenders charge a fee if you pay off your loan early
If you are in a position where you’ve managed your personal loan well and you want to pay it off early, some lenders will charge a fee. That’s because they are losing out on interest with your loan being paid off early. You can’t forget that these lenders aren’t in the business of helping you – they’re in the business of helping themselves. It’s all business.
#5 Personal loans don’t typically come with promo offers
The final reason why personal loans are a bad idea is because you can usually get promotional offers on other forms of debt. For example, if your goal is to consolidate debt, you could get 0% interest for 12+ months with a credit card.
Most personal loans don’t come with promotional offers. So, depending on what you plan on using the loan for, you may be better off with a different option. One thing I will say though, you know exactly where you stand with your personal loan. The terms of the loan aren’t going to change. That means no surprises to your budget!
Sometimes, personal loans can’t be avoided. However, it’s best to know what you’re getting yourself into before you get into it! The rationale above for avoiding personal loans should not be taken likely. Proceed with caution before taking out any form of credit. Have you had personal loans before? What experiences (good or bad) did you have with them? Drop a comment below to share!