When a Personal Loan is Bad

Personal loans should always be a temporary solution to a temporary problem.  Emergencies happen and most of the time, they are costly.  It is not uncommon to find that the budget or the cash flow does not include any or enough money for an unplanned circumstance.  In that case, a personal loan might be a good idea.  At the same time, depending on the situation, it might not. 

It might be defeating the purpose to get a personal loan if there is no means of repaying it.  Yes, you have to be approved for most personal loans.  The lender usually pulls a credit report and takes a very lengthy application from you.  With the gathered information, the lender determines your ability repay the loan.  If you were honest on the application, you will be denied a loan if your debt to income ratio is too high.  This means, if you have more money going out than you do coming in, you are a high risk for defaulting on your loan because of your inability to repay it.

 There are some personal loans, such as a payday advance and a collateral/secured loan, where you are not asked for such in-depth information.  You can simply qualify because you are employed and or you have some type of property to use in lieu of repayment.  One example of a secured loan is a pawnshop loan.  These types of loans are almost never a good idea.

 Payday advance loans are very short term.  The interest is an absurd percentage of what you are borrowing versus how much time you have to repay.  In addition, the lender has direct access to your checking account.  At the agreed upon date of repayment, that lender has the right to deduct what is owed to them directly from your account.  If the money is not there, you will incur fees both from the lender and from the bank.  These fees can quickly add up to outrageous amounts.  When the money going out is less than what is going in, the initial problem of not having enough cash has now escalated to a need for more cash flow than before.  Nothing has been resolved.  The most common solution, which is really not a solution, is to go out to secure another loan to repay the initial loan.  This becomes a vicious cycle of debt that is extremely difficult to break.

 Secured loans should definitely be avoided whenever possible.  They are only secured by valuables and often times the valuable is worth quite a bit more than the loan it secures.   Never go out and get a secured loan with valuable property that you do not wish to part with.  If something happens and you cannot meet the terms of loan repayment, you lose that property for good.  The only way to get it back is to buy it back.  The catch is, you will almost certainly pay double the amount to purchase it from the new owner. 

 The bottom line is this: when you borrow money make sure you have the means to repay it.  When you cannot repay, you lose a lot more than what you had a need for in the first place.  Personal loans are never a good idea as a means of ‘staying afloat’.   Consider getting a second job to catch up with or eliminate debt all together.