3 Reasons to Avoid Personal Loans

3 Reasons to Avoid Personal Loans

No matter who you are, no matter how well or wisely you manage your money and no matter how rich or poor you are, there is going to be a time when you will be desperately strapped for cash. Sometimes, this may only represent a temporary situation, but sometimes it is the culmination of a long string of financial setbacks. When financial crisis hits and you are staring at a stack of bills and an empty refrigerator, gas tank and bank account, a short or long-term personal loan may seem like the perfect solution. Generally, this is not the case and here are three reasons why.

1. Lower credit means higher interest rates:

Personal loans are a particularly bad idea if you have bad credit. Since bad credit makes you a credit risk, you will pay extraordinarily high interest rates on a personal loan. Your credit will also often take a nosedive when you are in any kind of extended financial crisis, such as being unemployed for a long period of time or experiencing some type of ongoing illness that brings big medical bills. If your credit is not bad and you can get a low interest rate loan, then it isn’t quite as catastrophic as trying to take out a personal loan with bad credit. In that situation, you are generally just taking a bad situation and making it infinitely worse.

2. Shorter terms means higher payments:

Once again, taking out a short term loan can often cause a bad situation to just get significantly worse. Since personal loans often have much shorter terms than other types of loans, it also means higher payments. If you don’t come out of your financial slump quickly after taking out a loan, you will only dig yourself even deeper into a financial hole. Generally, when you go through a difficult period financially, you don’t generally rebound quickly. It generally takes some time to get back on your feet financially, even if you experience some kind of turnaround in your finances. If you are unemployed and take out a personal loan to make ends meet until you get a job, even if you get a job just after taking out the loan, you will now be saddled with a high loan payment in addition to trying to get all of your other debts and bills back under control.

3. The best way to get out of debt is almost never to create more debt:

Taking on more debt when you are already in debt is like pouring more water into an already sinking ship. A far better option to taking on more debt is slashing expenses instead. Too often, when people experience financial hardships, they try to maintain their same lifestyle. Cutting expenses like cable, expensive cell phone plans or eating out can go a long way towards helping you conserve your resources rather than just creating more debt. Transferring your debt, however to a lower interest credit card is not creating more debt or taking out a loan on things you already own, such as a car or home can also be better alternatives to personal loans.

Edward Schinik is the CEO of Yorkville Advisors.

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