A good reason to borrow is if you are faced with a financial emergency, you intend to consolidate debt, you need to purchase a vehicle, or if you need money for immediate home repairs. Borrowing money can put a dent in your credit score and increase your overall debt. But using a loan for one of these reasons can help you avoid further problems.
According to CNBC, the average American has $90,460 in debt.1 For some people, this amount of debt is manageable, while others may struggle to keep up with their monthly installments. The right amount of debt a borrower should have varies because it depends entirely on their income and monthly expenses.
Keep reading to learn what factors you should consider before submitting an application for traditional or online loans.
Determining When To Borrow Money
If you are borrowing money from a friend or family member, there is not too much to be concerned about other than how the financial aspect might affect the relationship. You likely don’t need to be concerned about an interest rate or origination fee.
On the other hand, when you borrow money from a financial institution, you will want to be a bit more selective about what qualifies as a good enough reason to get funding. Getting a personal loan can be an excellent way to obtain financing when you need it. However, personal loans aren’t something you can get at the drop of a hat every time you don’t have enough money. Nor should you.
Think Before You Apply!
You will want to have a good reason to get a personal loan. Wanting to buy the latest flat screen or a brand new iPhone should not qualify as a great reason for applying for a personal loan. A personal loan will appear on your credit report, therefore having an impact on your financial future. Borrowing money costs money through interest and fees when it’s not a loan from a friend or family member.
To better determine how to borrow money, read about some common loan options below.
When To Borrow Money: A Breakdown
|Loan Type Suggested
|Points to Note
|Stable Income, Good Credit Score
|Ability to secure lower interest rates
|Personal Loan, Secured Loan
|Look for loans with no early repayment penalties.
|Risk of default due to income instability
|Avoid High-Risk Loans (e.g., Payday Loans)
|Consider building a more stable income source before borrowing.
|High Existing Debt
|Debt Consolidation Loan
|Only beneficial if it lowers overall interest payments and simplifies debt management.
|Short-term Financial Gap
|Temporary cash flow issue
|Short-term Personal Loan
|Ensure the loan has a flexible repayment plan aligned with expected income recovery.
|Potential to generate income
|Assess the risk vs. return, including the cost of loan interest.
|Low Credit Score
|Higher interest rates and limited options
|Secured Loan, Co-signed Loan
|Focus on improving credit score for better terms in the future.
|Major Purchase (e.g., Home, Car)
|Mortgage, Auto Loan
|Ensure the monthly payments are manageable within your budget.
|Consider future earning potential and repayment terms.
|No Emergency Fund
|Risk of not covering unexpected expenses
|Establish Emergency Fund First
|Prioritize building a savings buffer before taking on additional debt.
|Potential for increased income
|Prepare a solid business plan to justify the loan and its repayment.
Personal Loans for Borrowing Money
One of the best aspects of personal loans is that there are many different kinds of them. When you need to borrow money for a specific reason, there is an abundance of online lenders who offer personal loans for you to choose from.
More About Personal Loans
Personal loans are typically unsecured and repaid in monthly installments. Most lenders don’t need to know how borrowers plan to use the money, which makes them incredibly versatile. Lenders often accept a wide variety of credit scores depending on the personal loan type. Unfortunately, bad credit scores affect borrowing, so be prepared to pay higher interest rates, especially if it is an unsecured loan.
Bad Credit Options
A common type of instant loan for individuals with poor credit are fast payday loans. Payday loans are small, short-term cash advance loans meant to cover your necessary expenses until your next paycheck. Cash advance payday loans are extremely high-interest debt and should only be relied upon as a last resort.
More About Payday Loans
Typically a payday loan needs to be repaid in a single lump sum when you next get paid. This can be difficult to afford with such high-interest rates. You will need to be sure you can afford to pay off the personal loan according to the payment plan before you borrow money with a bad credit score.
Another excellent option for borrowers with poor credit in need of a personal loan is to get a secured loan. Secured loans are borrowed against collateral which reduces the risk for lenders as they can claim the equity in the collateral if the loan is defaulted on. It will be possible to get a lower interest rate when a loan is secured versus unsecured.
Some borrowers prefer to borrow money through revolving credit so they can keep up with unexpected expenses as they present themselves. Credit cards typically have pretty high-interest rates because, like personal loans, they are unsecured. Credit card debt is tricky because it can be tempting to rely on your cards too much. You don’t want to build up too much debt to pay back.
Good Reasons To Borrow Money With a Personal Loan
If you are taking on any kind of interest-bearing debt, financial experts will recommend that you provide a good reason. The best reason to give for a personal loan is an unexpected emergency.
Here are a few excellent examples of good reasons to borrow money through a personal loan:
Last Resort In an Emergency
Unexpected costs can pop up at the most inconvenient times. Unfortunately, emergencies don’t wait until your financial situation is stable. If you don’t have the cash to handle an emergency expense, a personal loan could be your best option. However, after you’ve paid off your personal loan, consider saving for an emergency fund, so you don’t have to turn to high-interest debt in the future.
An incredibly common reason to borrow money is to finance the purchase of a car. An auto loan works very similarly to a personal loan, except it is secured, which means it can be easier to get lower fixed interest rates. Auto loans are secured through the use of the car’s equity value as collateral. Borrowers who don’t make their car payments on their auto loans risk losing their vehicle through repossession.
Debt Consolidation (Payday Loans, Credit Card Debt, etc.)
When credit card debt becomes too much, borrowers often use a personal loan to consolidate debt so that they can simplify their monthly payments and reduce their interest rate. Consolidating debt is an excellent reason for obtaining a personal loan, especially if you are able to save money through lower interest rates. If you are primarily looking to turn your many monthly installments into one payment a month, you might also want to look into a balance transfer credit card.
Home Improvement or Repairs
Another reason an individual might decide to obtain a personal loan is to cover home improvement or repair costs. Borrowing money to cover moving costs and the improvements you need to make when you first move in by applying for a personal loan can make your move possible when you’re in a hurry. Some home repairs can be put on hold until you save money to pay for them, but not all of them can wait. If the heating furnace breaks down, a personal loan might be the only option to get it fixed by the time winter arrives.
Tips for Handling Your Personal Loan
Before taking out a personal loan, it is important to have a plan as to how you will repay it. Personal loans work incredibly well for borrowing money as long as you handle them responsibly according to the repayment terms outlined in the loan agreement.
Here are a couple of tips for managing your personal loan to improve your finances:
Make Your Monthly Payments On Time
Always complete your monthly payment on time. Late payments will negatively impact your credit score and possibly incur late fees. Damaging your credit score by missing your monthly payment could harm your chances of obtaining funding in the future or increase the average APR you qualify for.
Check Your Credit Report
Check your credit history to catch any issues or inaccuracies as you are paying off your personal loan. Checking your credit regularly will help keep it in good shape while you are paying off your debt. You can request a free annual credit report from each credit bureau to keep track of all the changes each year.
Pay Off the Loan Early
If your lender doesn’t charge prepayment penalties, paying off your personal loan long before it is due to be paid off could save you a significant amount of money on interest. Paying off your loan early will ensure no late or missing payments and build your credit score, increasing your overall financial security and health.
Create An Emergency Fund For The Future
After paying off your personal loan, your best next move is to start saving money for an emergency fund. Having an extra chunk of cash on hand whenever you are hit with an unexpected expense is one of the best things you can do to protect your future income. With a savings account dedicated solely to emergency costs, you will no longer need to borrow money to cover costs that aren’t accounted for in your monthly budget.
FAQ: Reasons to Borrow Money
Secured loans require collateral, such as a home or car, which the lender can claim if you default. Unsecured loans, like most personal loans, don’t require collateral but often have higher interest rates due to increased lender risk.
A home or mortgage loan can be a good investment if it leads to home ownership, potentially increasing in value over time. It’s important to ensure the repayments align with your future income and don’t overburden your finances.
Payday loans represent a quick source of funds for emergency expenses, but they come with high interest rates. They should only be considered when all other options are exhausted and you’re confident in your ability to repay quickly.
Yes, loans can be used to generate income if invested wisely, such as starting a business or buying property to rent. However, it’s crucial to weigh the potential income against the cost of paying interest and the risk involved.
Debt consolidation loans can simplify your finances by combining multiple debts into a single payment, often with a lower interest rate. This can make managing debt easier and potentially save money on interest payments.
If emergency expenses are high and would significantly deplete your savings or emergency fund, a loan might be a better option. It’s important to maintain some savings for future unforeseen needs.
Before using a loan to cover unexpected costs, assess the urgency of the expense, compare loan options, and ensure the repayment plan aligns with your future income without causing financial strain.
Taking out a loan and consistently making on-time payments can improve your credit score. This demonstrates to lenders that you’re a responsible borrower, which can be beneficial for future credit needs.
Generally, it’s not advisable to take a loan to build emergency funds due to the cost of interest. It’s better to build these funds gradually through savings. However, in certain situations where immediate funds are needed, a loan might be a temporary solution.
Not all debt is the same. Good debt is an investment that generates long-term value or income, such as a mortgage for a home that appreciates in value or a student loan for education leading to higher earning potential. Bad debt, on the other hand, typically involves borrowing for depreciating assets or non-essential items, like using high-interest credit cards for luxury purchases that offer no return and can lead to financial strain. The key difference lies in the potential of the debt to improve your financial position in the long term versus creating unnecessary financial burdens without future benefits.
Good Reasons to Borrow Money From CreditNinja
Debt can make your life stressful and put a dent in your wallet. But there are times when we all need a little financial assistance to get by. If you have a good reason to borrow money, make sure to research multiple lenders and compare loan offers. Making an impulsive financial decision can result in predatory loan terms.
If you need a loan for an unexpected emergency, consider using a CreditNinja personal loan. Personal loan funds can be used for almost any emergency, and we offer exclusive rewards for customers. Read our online reviews to see why CreditNinja remains one of the top lenders in the U.S.
- Here’s how much debt Americans have at every age │ CNBC
- 6 Good Reasons To Get A Personal Loan │ Forbes Advisor