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Though personal loans are a reasonable way to borrow, you may want to explore other avenues.
Key points
- A personal loan lets you borrow money for any reason.
- You may not want to take out a personal loan this year due to rising rates and cheaper alternatives.
When you take out a mortgage, you can only use that money to finance the purchase of a home. When you take out an auto loan, your proceeds must be used to finance a car.
Personal loans are far more flexible. With a personal loan, you can borrow money for any purpose.
Want to start a small business? A personal loan could make that happen. You can also take out a personal loan to renovate your home, buy furniture, or go on vacation.
Personal loans tend to charge a lot less interest than credit cards, and they’re a reasonable choice in situations where you have a pressing need for cash, such as a sudden home repair. But before you rush to take out a personal loan this year, you may want to reconsider for these three key reasons.
1. Rates could be higher than anticipated
While personal loans do tend to come with competitive interest rates, those rates might climb this year following rate hikes by the Federal Reserve. Though the Fed doesn’t set personal loan rates, it can influence them, and if those rates rise, personal loans could become less affordable.
2. You may be able to borrow for less
If you own a home, you may be able to score a lower interest rate on a home equity loan than with a personal loan. These days, U.S. homeowners are sitting on a record level of equity in their properties, so qualifying for a home equity loan may be easier than ever.
Also, while many borrowers use home equity loans to finance a renovation or home repair, like personal loans, home equity loans can be used for any purpose. You’re not limited to home-related items just because you’re borrowing against your home.
3. You may be able avoid the debt in the first place
If you have a pressing need for cash — say, your roof needs to be replaced and you don’t have the money in savings to pay for a new one — then a personal loan is a good way to borrow money in a pinch. But if you’re borrowing money for a non-pressing need — say, a family getaway or updated furniture — then several months of savvy budgeting could potentially spare you from having to borrow money in the first place.
Imagine you want to take a vacation in August and need $2,000 to pull it off. If, over the next six months or so, you really do a solid job of cutting back on non-essential spending, you may be able to eke out enough savings to sock away the money you need. That way, you’ll avoid having to borrow and accrue interest on a loan, even if the interest rate you’re given isn’t outrageous.
Personal loans can be a suitable borrowing option in many scenarios. But before you sign up for one this year, think about the drawbacks involved, and see if there’s a way to avoid having to take one out — or take on any new debt, for that matter.
The Ascent’s Best Personal Loans for 2022
The Ascent team vetted the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on The Ascent’s top picks.
