When you need money and do not have savings to back you, personal loans seem appealing because of the absence of collateral and a guarantor and an opportunity to borrow a large sum of money that you can use as you wish.
Like any other debt, personal loans also have some downsides, and you must know them, so you do not rue the day. You can use these loans for emergencies as well as planned expenses. Contrary to payday loans, they are repaid in fixed instalments over a period that makes them seem affordable.
It is not surprising that people find these loans a severe headache, contrary to their expectations that they would come in handy and be paid back on time.
You cannot seek perfectionism in anything, especially in debt. You need to weigh the pros and cons, so you do not regret it down the line.
Is taking out a personal loan a bad reason?
Some people assume personal loans are bad, but the fact is they are bad only when you take them out for the wrong reasons. Here are the reasons why personal loans may not be a suitable funding source.
You are using them for wants
If you take them out to fund your wants personal loans in Ireland will haunt you for years. These loans are expensive: the APR is generally between 11.99% and 25.99%, depending on your credit rating. It is better if you have savings to meet your inessential expenses.
Look over your outgoings and then see if you can save some money from incomings. If not, you will undoubtedly have to whittle down your expenses not to mention the first area to be looked at is discretionary expenses. If you manage to save some of your money and are still struggling to meet all of your expenses, you will have to take a holistic view of your expenditure.
Note that you cannot add an emergency cushion to your savings as it must be dipped into when you encounter an unforeseen expense. Wants are not a part of that.
You want to cover your living expenses
Personal loans are not the right choice to meet basic living expenses. For instance, you are mistaken if you want to borrow money to pay rent or utility bills. Do not forget that these loans should be used to fund one-off costs and rent and utility bills are recurring expenses.
Suppose you borrow money to pay rent this month. Now you do not just have to pay the rent amount but interest, which means an additional burden on your pocket.
When the due date to settle the loan comes, rent will become due. Now you will not just struggle to pay down the debt, but you will also have to struggle to pay rent. This time you will borrow money to cover both expenses, and in the end, you will end up falling into a debt trap.
Therefore, it is suggested that you take care of your budget. Look over your income and then see if you are able to meet all of your expenses. If incomings fall short, you should figure out ways how you can whittle down your expenses. Try to make a lean budget. It includes the room for essential expenses only. Consider earning more money, as this will help you stay afloat.
You are not sure about payments
When you apply for a personal loan, your lender will inform you about the monthly payment size. At this time, you will clearly see the interest you would be paying on the debt. If you suspect your repaying capacity, you should drop the idea of borrowing money. However, refusing to accept the loan terms at this moment cannot save your credit points.
Therefore, you should try to get a pre-approval letter. Although you will not get to know the exact interest rates, you will have an idea of how much you would be charged. If it is not feasible to get pre-approval, you should use online loan calculators. You will get an idea of how much the loan would cost you. Because the calculator gives just an estimation, you should try to set aside more money because a lender would run a credit check and peruse your repaying capacity thoroughly at the time of application. Further, other fees are also added. Online calculators do not include processing fees.
You are borrowing to invest money
Some people take out personal loans in order to invest so they can grow money and easily get out of debt, but it is the wrong way of using these loans.
They have been designed to meet expenses when you need money. You should avoid using them for investment purposes because if you do so, you will likely fall into debt. The investment world is extremely dynamic. There is no guarantee that you will earn revenue from your assets. Sometimes investors lose their entire money. This will push you into financial turmoil, and eventually, you will default on your loan permanently.
This will affect your finances brutally. You will not be able to borrow money at affordable interest rates.
To sum up
The best time for taking out personal loans is when you are in need of money, and your savings have fallen short of cash.
Of course, you are not supposed to borrow money for recurring costs or your wants. However, they are used for planned expenses but only to fund the gap.
Make sure you have a good credit rating to avoid difficulty qualifying for the loan at better interest rates.
If you are unsure whether you should take out these loans, try to consult a financial counsellor. They will look at your current financial statement and then suggest what will be suitable for you.