When a Personal Loan Is not the Best Solution

A personal loan is not the best choice if you seek to finance business expansion or need working capital. Banks also have strict qualifying criteria and requirements. Applying for a loan doesn’t make sense if you do not meet them.

When to Avoid Personal Loans
If you have poor or tarnished credit, you may want to improve your rating first. Most financial institutions offer extremely high interest rates to borrowers with poor credit. Lots of fine print is another reason to avoid personal loans. Be wary if the agreement contains vague wording, legal jargon, and many clauses that are difficult to understand unless you are a professional.

Renovation, Car Purchases, Speculative Purposes
Applying for a loan is not the best solution if you seek to finance home repairs, extensions, renovations, and improvements. A better option may be to apply for a home improvement loan. By the same token, if you plan to buy a car, it is better to apply for a new or used car financing. The same goes for funding your college education, accommodation, and student-related expenses. Finally, it is a huge mistake to borrow and use the money for speculative purposes and high-risk investments such as stocks, forex trading, junk bonds, and others. If you are a novice investor, this can be described as gambling.

When it comes to urgent cash, a personal loan is not the best choice because it takes some time to get approved. It takes weeks and even months to have your application processed. There are alternative solutions if you are in a tight spot. Credit cards, for example, offer many benefits and one is convenient and quick access to cash whenever you need it. You are allowed to draw on the credit line up to the available limit.

Reasons to Apply
Paying high interest credit cards is one reason to apply for a personal loan. The interest rate on credit cards varies but can be as high as 40 – 45 percent. Consolidation is a good option if you have multiple balances because it helps reduce the amount of interest paid. What is more, borrowers are left with one monthly payment to make instead of multiple balances.

Borrowers can choose from two options – unsecured and secured loans. The latter offers a lower interest rate but financial institutions require that some valuable asset is used as collateral. This is a good solution only if you can afford to make payments. Otherwise, you risk losing the asset used as collateral. The loan amount is typically a percentage of the value of the asset. It varies from one bank to another but it is typically in the range of 40 – 60 percent. Thus borrowers are offered less than the full value of the asset.