4 Signs You Absolutely Shouldn’t Get a Personal Loan

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

Getting a personal loan makes sense in a lot of situations, but not always. Watch out for these indications you shouldn’t take out a personal loan. 

A personal loan can be a great way to borrow for essential purchases you have to finance over time. With a lower interest rate than your typical credit card plus a fixed schedule for repayment, you can go into a personal loan knowing how much you’ll pay over time. Plus, your financing charges will likely be affordable.

But while taking out a personal loan can be a good financial move if you’re doing it for the right reasons, there are also some circumstances where you should just say no to a personal loan. Here are four signs that this type of borrowing would be a bad idea for you right now.

1. You don’t know how you’ll make the monthly payments

You should know exactly what your personal loan payments will be upfront. As such, you’ll want to make sure you can comfortably afford to pay them from your checking account each month. If you’re late with your payments, you could face late fees and damage to your credit. Before signing on for a personal loan, consider your whole budget and all your other expenses.

2. You’re borrowing to fund something you can’t really afford

Borrowing for something you can’t pay for all at once can make sense. But, there’s a difference between borrowing for something you can’t pay for upfront and borrowing to buy something you can’t really afford.

It would be reasonable, for example, to take out a $25,000 personal loan to upgrade your kitchen if you make $75,000 a year, take a five-year loan, and make monthly payments of $531 (assuming your loan has a 10% interest rate). You’d pay a total of around $6,870.57 in interest and your monthly payments would account for only around 8% of your monthly income. This isn’t too bad if you don’t have a lot of other debt.

It would not, however, be reasonable to take out a $100,000 loan on a $25,000 income to put in a luxury kitchen. Even if you found a lender willing to allow you to take out a 10-year loan, the monthly payments would still equal $1,321.51 — or more than half of what you make in a month. And you’d get stuck paying over $58,000 in interest on the loan, which is more than double what you earn in a year.

To make sure you aren’t buying something that’s actually unaffordable for you, aim to keep your total debt payments (including all other debt plus your loan) below about 36% of your income. Look at the total interest you’d pay over time and make sure it seems reasonable to you. And try to stick with a loan that has a repayment term of five years or fewer to keep costs down over time and avoid sticking your future self with bills for too many years into the future.

3. You’re making an unnecessary purchase with the personal loan

Taking out a personal loan to buy something you don’t really need is a red flag as well. There’s nothing wrong with sometimes splurging on unnecessary items — but only if you can pay cash for them. You don’t want to buy something that’s not necessary and not only waste the money for the item, but also make the purchase more expensive by adding interest charges onto what you’re paying.

If something is a true splurge and you don’t really need it, wait to buy it until you can save up for it.

4. You are hoping to get a mortgage soon

Finally, if you’re hoping to take on a mortgage loan in the near future, avoid taking out a personal loan. Your loan will increase your amount of debt and make mortgage lenders nervous you’re getting in over your head with borrowing. This could result in you not being approved for a home loan, or a lender charging you a higher rate. You don’t want to risk that when a mortgage is such a big loan you’ll have for decades.

If any of these four signs apply to you, avoid getting a personal loan. Instead, either save up for the item you need or wait until you can find a more affordable option that won’t leave you struggling to pay or stuck with unnecessary debt for decades.

Our picks for the best personal loans

Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing our picks for the best personal loans.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More