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A personal loan can be a great borrowing option, but you might regret it later. Discover why a personal loan may not always be a good idea.
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A personal loan can be a good borrowing option in certain circumstances. If you need to finance something you can’t pay for out of savings, a personal loan is a flexible borrowing solution that often comes with an affordable interest rate.
But while there are good uses for personal loans, there are also circumstances where you could end up regretting using one. Here are three reasons you may find yourself wishing you hadn’t taken out this type of loan at all.
1. You’ll have to pay interest costs
Personal loans charge interest. The average interest rate on a personal loan as of May 2023 was 11.48%. When you pay interest, you make the cost of whatever you bought more expensive.
Let’s say you take out a $5,000 personal loan with a five-year repayment period at the average interest rate. At the end of five years, you’d have spent $1,594.77 in interest costs. You would have made your purchase about 32% more expensive over time.
Paying more for whatever you’re borrowing for is something you may come to regret as the entire amount of money you spend on interest is money you would be unable to do other things with.
2. You will have less income to spend in the future
When you take out a personal loan, you commit to paying it off for several years in the future. Typically, you’ll pay your loan off for a period ranging between 12 months and 60 months or more.
This is your future income you are committing to spend on something you’re buying today. That $5,000 personal loan mentioned above would come with monthly payments of $109.91. Every single month for the five years after you pay off your personal loan, you’d have to subtract $110 from your paycheck before you even got a chance to spend that money on anything, since you’d have to send that money to a lender.
When you commit future income to something you buy today, you make it harder to live within your means later on. You won’t have that $110 to spend on a nice meal out or to help cover your car payment or to invest for your future. And, if you experience an income decline or want to switch to a job you like better which pays less, you’d still have that $110 you had to pay. This could leave you more stressed out about money, or make you feel like you can’t afford the pay cut.
Before you move forward with a personal loan, think about whether you really want to make a promise to a lender your future self must keep.
3. You could spend years paying off something you no longer benefit from
Finally, when you take out a personal loan, you could find yourself paying for something long after you stop enjoying it.
Say you take out a personal loan to go on vacation. Your vacation will be over in a week or two, but you’ll be paying for it years from now. In four years, when you make that monthly payment, will the memories of your vacation still sustain you so you are still happy to write the check? Or will you have forgotten the trip, but still be stuck shelling out funds to your lender for it?
In some cases, you will find that it’s worth it to pay extra interest, give up future income, and keep writing the check for your personal loan long after you no longer use the item(s) you bought with the money. In many cases, though, you may end up wishing you’d just not borrowed and instead waited to save up money to pay cash for whatever it was your loan proceeds went to.
Before rushing into a personal loan, take the time to truly think about whether you’ll be happy to pay it in a few years or whether you’ll be left with regrets.
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