When you’re strapped for cash, a personal loan may seem like an obvious solution. If collections agencies are calling you, unpaid bills are stacking up, and the refrigerator is as empty as your bank account, you might decide to look for a personal loan.
However, going down that road can lead to unwanted consequences and could potentially make things even worse. If you take out a personal loan without thinking ahead, you may find yourself scrambling to make payments down the road, which would leave you dealing with the same problems that caused you to take out the loan in the first place. Different personal loans come with different rates, fees and requirements, so check out what the best personal loans are to ensure that you choose the best option for you.
Here are five factors to consider before applying for a loan.
1) Bad credit personal loans have high interest rates
Taking out a high-interest loan with bad credit is like trying to fill a hole by taking out more dirt from that same hole. However, with a high enough credit score, you can find a personal loan at a low interest rate. Find out what rates you qualify for without hurting your credit score with SuperMoney’s loan offer engine
Those rates are much higher than a traditional credit card, which could be a better option. High rates can make it harder for you to repay the loan and remain solvent. Plus, taking out a new loan will hurt your credit score and make it harder to find a way out of your debt.
2) They have shorter terms
Most personal loans have three-year terms, which are often shorter than other types of debt. That usually means higher payments because you are paying it off over a shorter amount of time. High payments could make it harder for you to pay your bills in case you lose your job or have an unexpected emergency.
3) You might pay more in interest
Many people take out personal loans to pay off smaller loans so that they’ll only have one payment to think about. But some people inadvertently sign up for higher interest rates without thinking about it. Make a list of the debt you have and the interest rate. Compare that with the personal loan offers you see. If your rates are lower, then it’s better to keep the loans you have.
4) You might lose special protections
Some people try to take out personal loans to pay off student loans, which can have high-interest rates. But federal loans also come with a variety of protections and benefits, such as deferment and forbearance. If you pay off your student loans with a personal loan, you lose all the perks of having a government-backed loan.
Instead of taking out a personal loan, try to pay off your student loans as quickly as possible and then focus on tackling your other debt.
5) They may not solve your problem
Sometimes, a personal loan only fixes the symptoms, not the bigger problem. If you have a lot of debt and are considering a personal loan, ask yourself whether it will really fix your finances.
Many financial experts believe that solving a debt problem with more debt doesn’t really fix the problem. Before you take out a loan, think about getting a second job, refinancing your debt, or using your emergency fund.
Alternatives to personal loans
Not interested in a personal loan, but still need the money? Here are some good substitutes:
0% balance transfers
One of the best alternatives to a personal loan is a 0% APR balance transfer from a credit card. If you have credit card debt with a high APR, you can transfer it to a card with 0% interest. This rate usually only lasts 12 to 24 months, so try to pay off the balance before then.
Home equity lines of credit (HELOC)
If you have enough equity in your home, you can borrow money from the bank using your house as collateral. HELOCs have lower interest rates than personal loans and better terms because it’s considered a secured loan, unlike a personal loan.
Marketplace loans are still relatively new to most borrowers, but they usually have lower interest rates than of personal loans. Terms can last as long as five years, and lenders offer up to $35,000.
In some cases, personal loans are the best financial option. The key is to make sure you are getting the best rates and terms available. SuperMoney’s loan offer engine makes it easy to get prequalified loan offers without hurting your credit.
If a personal loan is still your best option, you can find a list of approved lenders here. Go to each company to see which has the best interest rates, terms, and customer service. Call them to see what rate you qualify for based on your credit score.