When an urgent financial need rears its head – a leaky roof, an emergency medical bill, or, heaven forbid, an unexpected funeral – many people turn to credit cards or payday lenders for help. These lenders can be punishingly expensive, but they may seem attractive because in such situations you just don’t have time to sit down and apply for a home equity line of credit or look at refinancing your mortgage.
You can get the funds from a personal loan within two weeks of applying online, making it just a little slower than the alternatives and potentially much more affordable. (See also: 5 Times Personal Loans May Be Better Than Credit Cards)
One of the most common uses for a personal loan is to consolidate existing debt, like credit card balances, student loans, and car loans. You may be able to get a lower interest installment loans in Tennessee city rate than you were paying on your other debts, and you also have the organizational benefit of having only one bill to pay each month. However, when transferring one kind of loan to another, you should .
Some marketplace lenders heavily market the idea of refinancing student loan debt into personal loans. But before you make a decision like that, you should compare your old loan and new loan carefully, the Consumer Financial Protection Bureau warned in a 2016 release.
“[I]n some cases consumers could lose important loan-specific protections by refinancing an existing debt. Specifically, consumers should know that they may sign away certain federal benefits, such as income-driven repayment for federal student loans or service member benefits,” the CFPB said. (See also: 8 Valuable Rights You Might Lose When You Refinance Student Loans)
If you’re trying to get a better rate on credit card debt while you pay it off, before you commit to a personal loan, shop around to see what else is out there. You may be able to transfer your balance to a card with a promotional 0 percent interest rate. Another potentially better deal could be taking money out of your retirement account for a short time, especially if you have a Roth IRA. Just make sure to pay back whatever you borrow.
Some lenders will try to throw in an insurance policy or other extra expenses as you close the loan. You may or may not want an insurance policy to make sure that your survivors aren’t stuck with your loan if tragedy strikes, but that’s a separate financial decision that you should undertake with research, not just because you’re under the impression that it’s required for your loan. (If the lender says it is, walk away.)
Also, ask the lender if they use the “pre-compute” method to calculate interest, or if they have prepayment penalties – you should avoid these, because both will punish you if you’re able to pay the loan back ahead of schedule.
One of the nice things about a personal loan is that unlike a car loan or mortgage, you don’t have to justify your purchase to the lender. However, there are things you should know better than to borrow for – whether it’s with a credit card, a home equity line of credit, or a personal loan.
Don’t take out a personal loan to buy an engagement ring; why would you want to start out your relationship with a pile of debt? While some lenders may advertise a personal loan as a “travel loan,” that’s another bad idea; once the vacation is over, you have nothing that you could sell to pay off the loan if you need to. Do I need to tell you that you shouldn’t take out a personal loan for gambling money? I didn’t think so. (See also: Never Borrow Money for These 5 Buys)