And that’s normally when your emergency fund would kick in. But what if you don’t have an emergency fund? Or what if there isn’t enough money in it to cover your current catastrophe? If you find yourself in this situation, you might consider applying for a personal loan to close the gap—but should you?
The simple answer? Probably not.
Starting with the basics—what is a personal loan? A personal loan is an unsecured debt that allows people or companies in need of money to borrow funds from lenders for any reason including but not limited to…
- Home improvements - Medical expenses - Debt consolidation
These loans are often set up for a short period of time with fixed monthly payments.
There are pros and cons to any form of debt. Personal loans are no different—they have their own set of benefits and drawbacks.
Personal loans can offer lower interest rates than credit cards, which can help you save money on interest payments. That can make them useful for consolidating other high interest rate loans.
However, personal loans can come with higher fees and significant interest rates. And for most financial emergencies, personal loans simply aren’t your best option. For instance, if you’re struggling with medical debt, you should first consider negotiating with your doctor’s office for more favorable payment terms first.
It’s not advisable to use a personal loan to make a large purchase, like a new TV, either. If you’re using the money for anything other than a last resort for emergencies or debt consolidation, it’s probably not worth it and could end up costing you more in interest payments down the road.
In conclusion, personal loans can be useful in specific circumstances or if you’re at the end of your financial rope. But they shouldn’t be your first option. Making sure you’ve got a sufficient emergency fund in place, a well-thought-out budget, and a solid savings strategy set up as soon as possible may help avoid the need for a loan and create more debt.