If you're considering a personal loan to pay for something like a vacation or to cover everyday expenses, you should stop and reconsider.
Unless you already have more money than you’ll ever need, you’re probably going to need a loan at some point.
(And if you do have more money than you’ll ever need, why are you reading this? You should be flying your own private helicopter, dropping cash on needy families. Of course, you might be reading this article while you’re doing that, in which case you should stop and focus on the flying and cash disbursal as reading while flying is very dangerous!)
… Anyway, there are many good times to get a loan!
“Loans are great for financial leverage,” advised Levi Sanchez, founder and financial planner at Millennial Wealth, LLC. “Meaning, they should be used in cases where access to capital to pay for an asset or education (in the case of student loan) isn’t readily available. If used for an asset, especially one that appreciates over time (such as a home), loans can be a great way to access them.”
So those are a few instances of good times to get a loan. What are some bad times to get a loan?
1. When you can’t afford a vacation.
We all need a vacation sometimes. It’d be nice to be able to go on whatever vacation you’d like, but there is not currently some sort of “federal vacation program” to provide for those who can’t afford their ideal vacation.
Until that legislation is approved, however, you may have to put some severe limits on the kind of vacations you take. And using a loan to pay for a vacation is never a good idea.
“Loans should not be used for expenses,” warned Sanchez. “Meaning, you shouldn’t use credit cards (without expecting to pay it off within the month to avoid interest charges) or personal loans to finance a big vacation.
“In doing so, you’d be clearly spending above your means and paying high-interest charges for holding a loan of that nature for a period of time.”
2. For regular bills.
Ideally, you’d only take out a loan as an investment in the hope that it’ll bring greater returns one day. But unfortunate surprises happen. If you have an unexpected medical expense or your car suddenly breaks down, you may find that a personal loan is your only way to cover the expense.
If that is the case, you’ll want to research all of your possible options to find the ideal, most affordable loan for your situation. The right loan with the right payment schedule can allow you to get through this setback in the best position possible.
However, if you’re finding yourself taking out a loan or even considering taking out a loan to pay recurring expenses, like groceries, rent, or utilities, then there’s a pretty significant problem afoot.
There are many expenses you can’t cut down on, but if you’re taking out loans for recurring expenses, you’ll just be getting further and further in the financial hole. Ask for help from a friend or family member if you have one or consider seeking out government assistance.
You probably already knew that taking out loans regularly is bad for your financial health, but just in case, now you know.
3. If you don’t have a plan to pay it back.
You should always make sure you have a payment plan before taking out any loan—whether it’s a mortgage, an auto loan, or a regular unsecured installment loan.
However, it might be tough in an emergency situation when you feel like you just need to get the cash as quickly as possible. And that’s doubly true if you don’t have good credit and your only options to borrow money are bad credit loans.
But taking a few extra steps in the short term can you leave you much better off in the long term.
“It is not a good time to get a loan if you don’t have a solid plan to pay back the loan,” advised Jaquetta T. Ragland, owner of YoungandFinance.com. “Some people apply for a loan because they meet the qualifications but they have no plan in place to pay it back.
“This is dangerous because it can cause you to fall behind in your payments which will have a negative impact on your credit score because of missed payments. In addition, it could cause an increase in your interest rate which will also raise your monthly payment requirement.
“If you don’t have a solid plan in place to pay back the loan, it is not a good time to have one.”
4. If your credit needs improvement.
You can’t predict when the aforementioned financial emergency might happen. But if you can avoid taking out a loan when your credit needs improvement, you’ll be better off.
“You should also NOT get a loan if you don’t have good credit,” explained Jennifer Harder, Founder & CEO of Jennifer Harder Mortgage Brokers. “If you want a personal loan that has a better interest rate than a credit card, you’ll have to have some strong credit history.”
In order to avoid taking out an online loan or visiting a brick-and-mortar storefront to cover costs during a financial emergency, you’ll need to have a well-stocked emergency fund in place.
5. When a credit card could work.
Used improperly, credit cards can get you in a lot of trouble. But used properly, and paid off in full every month, they can be very useful tools that can help build your credit.
“With a strong credit score you can qualify for a zero percent APR credit card that meets the needs of your loan amount,” offered Jared Weitz, CEO and Founder of United Capital Source Inc. “Although many loans can have strong interest rates, nothing beats 0%.
“If your finances are already very unstable, and you have reason to believe your income or employment situation may change in the near future, taking out a loan when finances are unsteady can hurt you long term if it becomes not possible to repay on time and you let the interest rise.”
When it comes to getting a loan, it’s all in the timing. And we hope these tips will help with yours.
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, BEHAVIORAL FINANCIAL ADVISOR™ and Founder of Millennial Wealth, LLC (@millennialwlth), a fee-only financial planning firm for young professionals and tech industry employees. Levi’s been quoted in the New York Times, Business Insider, Forbes, and is a frequent contributor to Investopedia. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!
Jared Weitz (@jaredweitz) has been in the financial services industry for over 10 years. Due to his extensive work experience and deep network of close financial relationships, he handles a multitude of different finance options for his clients and contacts. Over the years, he has held positions in some of the largest business financing companies in the U.S. Some of his roles have been: Underwriter, Director of Business Development, Managing Partner and currently, CEO of United Capital Source, LLC.
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