Are personal loans bad? When not to apply

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.

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.

Discretionary Spending

Borrowing money for discretionary spending — that is, unnecessary things like spa services and unneeded clothing — can be a recipe for disaster. 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

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

The problem is that 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

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).

Paying for Basic Expenses

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.