Personal loans—types of installment loans—are some of the most versatile loan options available, and you can use them for almost any reason, including shopping. However, using one of these loans may not be the best idea if you want to stop spending unnecessarily and being financially irresponsible. In other cases, you may need to buy certain items, and a personal loan could be the only option. Continue to read to learn more about some of the risks and benefits of using a personal loan for shopping.
How Do Personal Loans Work Exactly?
A standard personal loan is an unsecured loan repaid in monthly installments. You can find a personal loan with a bank, credit union, or private lender.
Personal loans come with long or short repayment terms, making them a good option for various budgets. Interest rates for these loans can range from 3% to 36%, depending on your credit score, income, and the lender you choose to work with.
Loan amounts can range from a few hundred dollars to a few thousand. Once you take out your personal loan, repayment will restart in about 30 days, and each monthly payment will encompass both interest rates and the principal amount.
Why Do Most People Take Out Personal Loans?
Most personal loans are taken out for emergencies; here are a few examples of the most common uses for these loans:
Rent or Mortgage Payments
Many personal loans go towards the most significant payments that most people have each month; their rent or mortgage. Personal loans can be a great way to take care of one or multiple rent or mortgage payments if you are struggling financially, and many people do so.
Another everyday use for a personal loan is car repairs. Car repairs can be simple and cost just a few hundred dollars, or they can be extensive and cost thousands of dollars. Either way, the flexibility of a personal loan can help take care of a small or large cost.
Monthly bills can include everything from utilities, groceries, insurance payments, etc. The great thing about personal loans is that you can allocate the funds to multiple payments. The loan’s versatility makes them extremely popular for numerous bills.
Debt consolidation is the process of taking out a new loan to pay off multiple debts. Ideally, you will want a better interest rate and more manageability. Many people use personal loans to consolidate debt because these loans come with highly competitive interest rates and flexible repayment plans.
A Car Purchase
Although an auto loan is the first choice for vehicle purchases, personal loans are also popular for used vehicles. With a personal loan, you can get a few years for repayment and enough financing to buy a used or new car, depending on your credit and income.
Sometimes the bills and payment plans from hospitals may not be manageable. And so, many people turn to personal loans to cover those costs.
Major Life Milestones
Another use for personal loans are milestones like weddings, home buying, first-time parent costs, college expenses, and more. When facing these milestones, unexpected expenses may come up, or you may go over budget. A personal loan can help cover those expenses with affordable monthly payments.
And so, as you can see, shopping isn’t a part of this list because, in most cases, it isn’t considered a financially smart move to use a personal loan for shopping. More information on the risks and some benefits below.
Some of the Risks of Using a Personal Loan for Shopping
There are definitely risks involved when using a personal loan for shopping, especially when shopping for your wants vs. your needs. Here are some things to consider:
The Risk of Hurting Your Credit Scores and Credit History
Your credit score is composed of different factors, including the amount of debt you have, the type of debt you have, and your habits with them.
There are a few ways that a personal loan can impact your score. If you take out a personal loan, you may increase your credit utilization, which, if over 30%, can hurt your score. If you miss even a single payment with your loan, you will hurt your score, which can happen if you don’t have to budget for a loan. If you are already struggling to pay your bills, you should not take out a personal loan for just shopping.
Taking out any loan option will risk hurting your score, so before doing so, take a good look at your financial situation!
Excessive Debt Can Lead to Bankruptcy
Another risk with a personal loan for shopping is getting into debt you cannot get out of. In 2021, 413,616 Americans filed for bankruptcy due to the need for debt relief. If you often borrow funds to shop, you may want to double-think about your lifestyle, as too much debt can quickly become unmanageable and lead to bankruptcy. Bankruptcy will take a tier-one credit score down to a poor one, making it difficult to get financial products, buy or rent a home, and even get a job!
Inability To Repay the Loan if Your Finances Change
Finances can change quickly and without notice. For example, let’s say you take out a personal loan to shop with and lose your job in three months. In that case, you may not be able to repay your loan.
Missed payments on a loan can lead to loan default, which not only hurts your credit score but it can lead to your debt being transferred to a debt collector. A debt collector or debt collection agency can lead to complications. If you do not pay a debt collector, they can take you to court—something a lender cannot do.
The Risk of Not Being Able To Take Care of Your Necessary Expenses
If you take out a loan that you cannot afford, especially for something like shopping, you may not be able to take care of your necessary expenses each month. If you don’t already budget, you may not even be sure of the money you consistently have in your bank account and the monthly bills you must pay. And so, even before you compare loans, look at multiple lenders, or go through the application process for a loan, it is essential to know what monthly payment you can and cannot afford.
Excessive Shopping Can Impact Your Relationships
If you already have debt because of shopping and share your finances with another person, taking out more debt may harm your relationship. This is especially true if you have had issues with spending before. If you want to avoid fights about money in your relationship, be sure you are honest about a new loan with whomever you share money with.
Some of the Benefits of Using a Personal for Shopping
In some cases, using a personal loan for shopping can be beneficial. However, these benefits will only outweigh the negatives if the things you buy are necessary. With that in mind, here are some benefits of using a personal loan for shopping:
Interest Rates Can Be More Competitive Than Credit Cards
Personal loans have an annual percentage rate that is often lower than credit card options, especially if you have a good credit score. With bad credit, you may have an easier time getting approved for a personal loan than a credit card.
Financing Can Make a Necessary Purchase Affordable
Let’s say you need to buy something like a fridge. A fridge is a necessary home appliance that can cost thousands of dollars. If you don’t have the money upfront, the only way you may be able to make that purchase is by using a shopping loan to borrow money. And so, a personal loan for shopping can definitely provide the benefit of affordability.
A Small Shopping Loan Can Help Build Your Credit Mix
Your credit reports from all three credit bureaus will have a list of all your credit accounts, and having diversity will be beneficial. If you are just starting out with your credit, taking out a small/manageable personal loan can help add more diversity to your credit report.
Picking the Best Personal Loan
If you do decide to get a personal loan, there are some things you should look at to find the best one; here are some things you need to consider:
The Lender — There are different lenders available for personal loans; You can use direct or third-party lenders. You can use credit unions, banks, or private lenders. No matter what potential lenders you are thinking of, it is essential that you research them. Look at past customers’ experiences and any consumer complaints filed against them.
Loan Terms — Loan terms will have everything about repayment on the loan. You will find details on origination fees, late fees, whether a lender offers early repayment, loan amount, and how much you will pay each month.
Repayment Periods — Another thing to think about is whether you want a short-term or long-term loan.
Compare Rates — Interest will be the highest cost of borrowing money, so it is essential to compare rates before choosing a personal loan.
Is a Personal Loan Right for My Purchase?
The last thing you need to think about is whether a personal loan is the right choice for your purchase. In most cases, personal loans will work well, but there are some scenarios in which other loans will work better.
Business loans may work better if you are trying to finance business expenses. They may come with more funding, longer repayment terms, and your personal credit may not be impacted.
Another scenario where a personal loan may not fit is if you are shopping for a home. In this case, you technically are mortgage shopping and should be working with mortgage brokers/lenders. If you are unsure where to start, a real estate agent can help you connect with mortgage lenders. You can however use a personal loan for things like closing costs with the home-buying process.
The final scenario is a new car purchase with bad credit. Auto loans may work better than personal loans because they may offer longer repayment terms and a more substantial amount for bad credit borrowers—the kind needed to purchase a brand-new vehicle.