Taking out a personal loan for everyday expenses can provide a boost to your finances after being unemployed, ill or have a series of emergency expenses that ruin your budget. Repeated borrowing to pay usual household expenses could indicate that it's time to adjust your finances to a cash-based budget. Here are considerations for taking out a personal loan to meet basic expenses along with potential risks.
Money's Tight? A Personal Loan Can Smooth Out a Rough Time
Whether you've returned to work after months of unemployment, are short of cash due to a prolonged illness or injury or want to square away household bills for any reason, a personal loan can help:
- In general, personal loans carry lower finance charges than credit cards and short-term payday advance loans, which can carry annual percentage rates of 400 percent or more. The Federal Trade Commission encourages consumers to avoid high cost loans and shop for the best available terms and lowest interest rates. A personal loan can help you get your finances in order rather than risking more debt caused by high interest rates and fees that can increase your debt faster than you can repay it.
- Borrowing a personal loan on a one-time basis to put your budget in order can be a smart move. Personal loans are made for specific amounts, generally carry fixed interest rates and are repaid according to a fixed repayment schedule. You borrow what you need, repay it on time and that's that. You won't have the temptation of continuing to rack up more debt and you won't incur extra costs of rolling over a payday loan into a new loan.
- The higher your credit score, the more likely you can borrow a personal loan. If you're borrowing to cover routine expenses such as utilities, rent or mortgage, or household needs such as groceries and home maintenance, consulting a non-profit credit counseling agency may help by consolidating your existing debts into one payment with lower interest rates.
- Use a personal loan to pay off credit card debt. If you used credit cards to make ends meet during troubled times, borrowing a personal loan to pay off your balances can help you save on finance charges, but this works only if you don't continue using your credit cards after paying off balances with a personal loan. Using a personal loan may help improve your credit. If you missed payments during your hardship, taking out a small personal loan can help you reestablish a record of on-time payments.
Personal Loan for Everyday Expenses: Things to Know
Meeting household expenses by taking out additional debt can be a useful tool or a nightmare. Researching personal loan options can help you find your best loan terms and potential savings. Your research can also help you avoid high cost loans that are difficult to repay.
Consider help with budgeting
If you regularly use credit to pay for routine household expenses, please consider consulting a financial advisor or credit counseling service to create a cash-based budget. The U.S. Department of Housing and Urban Development offers a network of HUD-approved housing and credit counselors that can help you work through financial challenges.
Avoid scams and predatory lending
When financial trouble occurs, you may receive unsolicited offers of help. Be wary of such offers and always take time to "sleep on" any offers or quotes you received. Reputable lenders don't offer financing on a "here today, gone tomorrow" basis. Don't be pressured into taking out a loan until you fully understand its terms, conditions and all financing charges involved. Check the annual percentage rate (APR) for any loan you're considering. The APR measures the annual cost of interest, lender fees and charges required for a specific loan. Comparing APRs for multiple loans can help you find the lowest cost for loans you're considering. The results of requesting and comparing multiple loan quotes will help you determine if borrowing a personal loan for everyday expenses is your best option.