The One Thing Too Many People Get Wrong About Personal Loans

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There’s a big misconception about personal loans. Read on so you don’t get hurt by it. 

As of the end of 2022, personal loan balances across the U.S. totaled $222 billion, according to data from TransUnion. And that’s not all that surprising.

There are different reasons consumers commonly turn to personal loans when a need to borrow money arises. For one thing, personal loans let you borrow money for any purpose. When you take out a mortgage, for example, you can only use your loan proceeds to finance the purchase of a home. With a personal loan, you can use your money to fix up your house, start a business, or take a vacation if that’s a priority for you.

Also, personal loans are known for their relatively competitive interest rates. By contrast, you might spend a lot more money on interest when you borrow by racking up a balance on one of your credit cards.

But while personal loans have their benefits, it’s important to proceed with caution before taking one out. And the one thing you don’t want to do is sign up for a personal loan without running the numbers first.

Don’t fall into a common trap

Because personal loan interest tends to be competitive, many consumers think they can just borrow on a whim and it’ll be affordable. But that’s not a given.

First of all, these days, personal loan interest rates are up because borrowing rates for consumers are up across the board. That’s a side effect of a string of recent interest rate hikes from the Federal Reserve.

Now, it’s true that you might snag a relatively competitive interest rate on a personal loan today. But that doesn’t mean you should rush into borrowing, nor does it mean you’ll automatically be able to manage your ongoing payments under that loan. So before you sign up for a personal loan, take a look at your expenses and figure out what monthly payments you can afford.

Also, think about why you’re considering a personal loan. It’s one thing to borrow money when you have home repairs you’ve been putting off due to a lack of cash, or if you’ve been itching to start a business but need seed money. It’s another thing to take out a personal loan and use the proceeds for things that are fun but not really necessary.

Remember, falling behind on a personal loan could have severe financial consequences, like major damage to your credit score. So you definitely do not want to get in over your head.

Shop around before you sign for a personal loan

Just as it’s important to figure out what sort of personal loan payment you can afford based on your income and bills, so too is it important to shop around for a personal loan rather than go with the first lender who’s willing to loan you money. Ultimately, each personal loan lender sets its own borrowing rate based on factors like your credit score. So if you’re going to borrow, take the time to do your research so you end up walking away with the best interest rate you’re eligible for.

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