Are Personal Loans Bad? When Not to Apply

Susan GuilloryUpdated February 23, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

You might be fantasizing about what you could do with a few extra thousand dollars. You could renovate that old bathroom in your house that you hate...or pay off your credit cards...or take a trip.And to get that money, you could win the lottery...or, wait a minute, how about getting a personal loan?But you’ve heard mixed things about personal loans. Are personal loans bad? Will they make your financial situation worse or damage your credit?The truth is: A personal loan is a big responsibility. Used smartly, it can be a wonderful tool. Used irresponsibly, it could damage your credit long-term.

When a Personal Loan Might Be a Good Idea

In the right situation, especially if personal loans interest rates are low, taking out a personal loan might be wise. It also helps if you’re using them wisely, like these reasons to apply for personal loans.

Home Improvement

Let’s go back to that outdated, ugly bathroom you hate. Taking out a loan to remodel it could be beneficial. Why? Taking out home improvement loans allows you to not only renovate your home to be more enjoyable and beautiful but also can increase the value of your home. So an investment now might help you sell the home for more later.Keep in mind there are some key differences between personal loans vs home equity loans, so look at both if you’re considering borrowing money for home improvement.Recommended: 6 Bathroom Remodel Financing Options

Debt Consolidation

It’s a common path: You take out a loan or two and rack up credit card debt on a few cards, and before you know it, you’re trying to cover five monthly payments all at different interest rates.In this situation, loans to consolidate credit card debt can be immensely helpful. You roll all those payments into one at a single interest rate, which can often be less than what you’re paying on some credit cards. In the long run, you may save in interest and be able to pay down or pay off your debt faster.

Emergencies

Ask yourself: If you had an emergency that cost several thousand dollars, do you have the money to cover that expense in your bank account right now? If you don’t, you’re not alone. Around half of Americans have less than three months’ worth of emergency savings set aside.So how could you pay for unexpected expenses? A personal loan. Taking out the amount you need to cover the emergency, you’d pay it back over months or years. Now that we’ve looked at some of the reasons a personal loan could be a good thing, let’s look at when a personal loan is bad.

When a Personal Loan Is a Bad Idea

Are loans bad? Not in and of themselves. But how you use them really determines whether they will be detrimental to your financial situation. In these examples, a loan may do more harm than help.

Discretionary Spending

If your credit is good, you might get offers in the mail for quick personal loans all the time. It’s tempting...borrow $5,000 and you could have a great time at the mall!But borrowing money for discretionary spending — that is, unnecessary things like spa services and unneeded clothing — can be a recipe for disaster. You may have a closet full of designer clothing...but you also now have a monthly loan bill to cover. And if you can’t afford to pay it, you run the risk of defaulting on the loan, which will then cause your credit score to plummet.

Problems Managing Debt

Maybe you took out a loan and you’re having trouble paying it, so you think taking another loan out to pay the first is a wise idea.Not so, because now you have two loans to juggle.Now, this is a different situation than what we discussed above with debt consolidation loans. If you’re already paying loan debt, it may be wise to consolidate it. But if you’re looking to cover existing debt, a second loan won’t ultimately solve that problem. Instead, consider asking your lender to refinance the loan so you have lower monthly payments.

No-Credit Check Loans

If you don’t have great credit, you might have assumed you’d never qualify for any kind of personal loan. But then you find an offer for a no-credit check loan. The lender won’t even look at your credit score, and will lend you thousands!Tempting, eh?The problem is, these loans typically come with exorbitant interest rates. You’ll end up paying far more to borrow money with a no-credit check lender than any other, and that could make your credit situation even worse.

You Have Access to Cheaper Credit

Just because you get a loan offer from one lender doesn’t mean it’s the best option for you. There are a number of different types of financing, and some will be more expensive than others. There are also loans with collateral and those without. And depending on your credit, you may also need to take out a secured loan (learn the differences between secured and unsecured loans). The key here is to do your research to find the most affordable financing possible.

Paying for Basic Expenses

Maybe you, like a lot of other Americans, have been struggling financially. You can’t quite make ends meet so you decide to borrow money to help pay your bills.The problem is, if you can’t afford to pay your bills, how will you afford an additional loan payment each month? You may be better off tightening your belt for a while until things get better.

Borrowing to Invest

Your friend just told you about an amazing investment opportunity that you just couldn’t miss out on. The problem is, you don’t have the money in the bank to invest. So you’re considering borrowing money. After all, it’s a sure thing and you’ll quickly make enough to pay back the loan. Right?Investing is never guaranteed. It’s risky, and markets are volatile. You might take out a personal loan for $10,000, fully expecting to make $20,000 on the deal, but what happens if you don’t? How will you repay the loan? Trying to make money on this investment could put you in financial distress.

Weighing the Pros and Cons

Back to the question: Is it bad to get a personal loan? Let’s break it down with a chart.

Pros	Cons
Provide capital for projects or emergencies	You must be able to afford to pay it back
Paying a loan on time can improve your credit score	Missing payments can make your credit score drop

Explore Personal Loan Options From Lantern

Now you know more answers to the question is getting a loan bad? It is if you use it irresponsibly. But for the right purposes (loan reconsolidation, home remodels, emergencies), having cash on hand can help you now and in the future.Lantern by SoFi can help you find financing that’s right for you. Explore the rates you qualify for with personal loans.

Photo credit: iStock/Dmitry Kopylets

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About the Author

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.

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