Can Personal Loans Backfire?

[Jul 30, 2010.]

 

You've probably seen a lot of offers on the Internet from companies that make personal loans. They make it seem so easy -- you just fill out an online application and voila! Within minutes you get approved for a loan that can be used for anything under the sun, including debt consolidation, tuition, or a new car.

Qualifying for a Loan

The reality is that it takes more than the ability to type to get approved for a personal loan. You generally need decent credit, a moderate debt-to-income ratio, and enough income each month to make monthly loan payments.

If you do get approved despite bad credit, expect a high interest rate. The interest you pay is worse if you go for a payday loan. If you don't pay back a payday loan when you get your paycheck, the high interest continues to roll over from month to month.

Loans Should Not Be Your First Choice

While loans can help you out of a jam and pay for purchases you couldn't otherwise afford, use caution when borrowing money. Getting a loan should never be your first choice to fund everyday purchases. The better alternative is to steadily save up for your needs and wants until you have enough cash.

Borrowing too much money can backfire if you suddenly lose your job or are faced with some other situation requiring most of your income, such as a major illness. Being laid off with little debt is a whole lot easier to deal with than losing a job and having to pay back thousands of dollars in debt.

Using Debt Loans

Also, while you may have good intentions about using a personal loan to consolidate debt, it's easy to get off track if you don't stick to a debt reduction plan. Debt loans should be used strictly to consolidate credit cards and other high-interest loans. Do not borrow money and hold back some of it to renovate your old bathroom, buy a new wardrobe, or take a vacation.

Furthermore, be careful about working with debt consolidation or debt settlement companies that require you to take out loans. Some of these firms are more interested in collecting fees than actually helping you settle and pay off debt.

Don't Rush into a Loan

Personal loans can be a useful tool when you manage money well. Any time you plan to borrow money, it's important to educate yourself thoroughly to avoid making costly mistakes.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.