A personal loan can be a powerful tool in managing your finances — as long as it is used responsibly. But given some of the taboos commonly associated with debt, you might think that taking out a personal loan is always a bad idea. Sure, taking out a loan means you’ll be in debt, and too much debt can hurt your credit score. Still, a personal loan can reap important benefits under the right circumstances.
Below are five signs that it might be a good idea to get a personal loan to improve your financial situation.
1. You’re saving money while carrying debt.
Bloomberg notes that the savings rate in February — which was 5.8 percent — was the highest it has been since December 2012. On a long-term basis, this is good news, as it suggests more people are trying to effectively plan for the future. “After years of spending as if there were no tomorrow, consumers are now saving like there is a tomorrow,” said Richard Moody, chief economist at Regions Financial Corp. Yet, it’s important not to ignore some basic economic realities.
In January, GOBankingRates published its 10 best savings accounts of 2015 list, with the best offered APY coming in at 1.10%. When you compare this to the average new credit card interest rate at roughly 15 percent, you quickly see that building up savings while carrying debt is a losing proposition. Rather than falling behind in the interest rate game, taking out a personal loan to consolidate your credit card debt could be a sound approach.
2. You can’t afford to pay your medical bills.
An unforeseen medical bill can create havoc in the finances of even the most diligent planner. The good news is that thanks to a recent change in the way the major credit bureaus look at medical bills, you will have 180 days to address these bills before they are added to your credit report. This can give you the time you need to apply for and secure a personal loan in the event that the bill is more than you can afford and a payment arrangement with the provider cannot be worked out. Just make sure you get a personal loan with a low interest rate and favorable terms.
3. Your moving costs are too high.
Moving can be an extremely stressful activity, particularly when you consider the myriad of expenses associated with it. Between movers, storage, boxes, supply, transportation and unexpected small costs, the total price can be significant.
U.S. News reported that the average cost of an intrastate move is $1,170, and a move between states is $5,630. It is tempting to simply put these charges on your credit card. But if you’re credit card compounds your interest, which many tend to do, you’ll be paying “interest on interest.” In other words, your interest will be calculated on the principal amount and the accrued interest. Taking out a small personal loan with a lower interest rate and simple interest — which is only calculated on the principal amount — might be an affordable option.
4. You can’t pay your car repair bills out-of-pocket.
Having reliable access to an operational car might be a critical part of your ability to earn a living. Car accidents that are not covered by insurance and unexpected major repair bills can seriously interfere with that access. If you can’t find a car repair shop that lets you take make affordable monthly payments on a hefty bill, it might be a better choice for you to take out a personal loan to pay for the costs.
5. You want to make home improvements but don’t have equity.
While you might be able to pay for home improvements with a construction or home equity loan, in some cases, these options might not be available to you. If you are planning to move relatively soon, there are certain home remodels that can add value to your home and make it easier to sell. These include kitchens, baths, outdoor features and roofs. To pay for these renovations or additions, it might be worth it to take out a personal loan. You should make an assessment of your home’s value and determine if the debt is worthwhile. Consulting an expert is a good idea, as well.
When used for the right reasons, personal loans that offer low interest rates and fair terms are great tools for managing your finances. If you are facing any of the above scenarios, consider consulting a lender to take out a loan.