4 signs you should never take out a personal loan

Personal loans can be a great way to borrow for essential purchases that you need to finance over time. With lower interest rates than regular credit cards and a fixed repayment schedule, you can take out a personal loan knowing how much you’ll pay over time. Plus, your finance costs will be cheaper.

But while taking out a personal loan can be a good financial move for the right reasons, there are also situations where you might need to turn down a personal loan. Here are four signs that this type of loan is not a good idea for you right now:

1. I don’t know how to pay monthly.

You need to know exactly how much your personal loan payment will be up front. So you’ll want to make sure you can comfortably afford to pay your expenses from your checking account each month. Late payments can result in late fees and damage to your credit. Consider your overall budget and all other costs before applying for a personal loan.

2. You’re taking out loans to finance money you really can’t afford.

It may make sense to borrow things you can’t pay for all at once. But there’s a difference between borrowing for something you can’t pay for up front and borrowing to buy something you can’t really afford.

For example, if you make $75,000 per year, take out a loan over five years, and pay $531 per month, it makes sense to take out a personal loan of $25,000 to upgrade your kitchen (assuming the loan interest rate is 10%). . The total interest is $6,870.57 and the monthly payment is only about 8% of your monthly income. If you don’t have a lot of other debt, this isn’t a bad thing.

it would ~ noHowever, it makes sense to take out a $100,000 loan on a $25,000 income to afford a gourmet kitchen. Even if you found a lender willing to accept a 10-year loan, your monthly payment would still be $1,321.51, or more than half of what you earn in a month. And you’ll have to pay more than $58,000 in interest on the loan, which is more than double what you make in a year.

To avoid buying something you can’t really afford, aim to keep your total debt payments low (inclusive). every Other debts and loans) are less than about 36% of your income. Look at the total interest you’ll pay over time and see if it makes sense. And stick with loans with repayment terms of five years or less to lower your costs over time and avoid being tied to the bill for too many years in the future.

3. You are making unnecessary purchases using personal loans.

Taking out a personal loan to buy something you don’t really need is also a red flag. There’s nothing wrong with splurging on unnecessary things sometimes. However, this only applies if you can pay in cash. I don’t want to buy things I don’t need and Not only is it a waste of money also Make your purchase more expensive by adding interest to the amount you pay.

If something is really extravagant and not necessary, wait until you can save up.

4. I am hoping to get a mortgage loan soon.

Lastly, if you want to get a mortgage in the near future, avoid personal loans. Your loan will increase the amount of your debt and make mortgage lenders nervous. This could result in your home loan not being approved or the lender charging you a higher interest rate. When your mortgage is such a large loan, you don’t want to risk taking it out for decades.

If any of these four signs apply to you, don’t take out a personal loan. Instead, save up to buy the items you need or wait until you find a more affordable option that won’t leave you struggling to make payments or trapped in unnecessary debt for decades.

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