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3 Bad Reasons to Take Out a Personal Loan in 2021

The Motley Fool logo The Motley Fool 1/18/2021 Maurie Backman
text, letter: 3 Bad Reasons to Take Out a Personal Loan in 2021 © Provided by The Motley Fool 3 Bad Reasons to Take Out a Personal Loan in 2021 text, letter: Loan agreement and pen on desk. © Getty Images Loan agreement and pen on desk.

There are plenty of loan products out there designed to help you finance the purchases you need or want. If you can't pay for a home outright, for example, you can take out a mortgage. And if you need a new vehicle, well, that's what auto loans are for.

The great thing about personal loans is that they're not earmarked for one specific purpose -- or purchase. Rather, you can take out a personal loan for any reason you choose. With a personal loan, you can consolidate credit card debt, buy furniture, or upgrade your electronics.

Personal loans also come with relatively affordable interest rates -- rates that are far more competitive than what credit cards charge. And if you have a good credit score, qualifying may be fairly easy.

If you're thinking of taking out a personal loan because you're having trouble making ends meet due to the pandemic, that's a reasonable thing to do. But here are a few bad reasons to borrow money with a personal loan this year.

1. You can't afford your bills but don't want to cut back on expenses

You may be inclined to take out a personal loan if you find that your paychecks are falling short in covering your expenses month after month. But before you do, take a closer look at your spending. Are you really living within your means? Or are you spending on luxuries you should consider dumping?

Say you currently bring home $3,000 a month and are renting a $2,000 apartment when it's possible to find homes in your neighborhood for $1,300. In that case, taking out a personal loan to keep up with your expenses isn't a great idea. Instead, you should look at moving. That's just one example, but the point is that a personal loan should not be used to subsidize a lifestyle you know you can't afford.

2. You want to take a big vacation

After spending the better part of 2020 cooped up at home, many people are eager to get out and travel this year. But as much as you may want to indulge in a big trip, if money is tight, financing a vacation with a personal loan isn't smart. You're better off taking a low-cost, low-key trip that you can afford to pay for outright. The good news is that there are plenty of great places in the U.S. that are accessible by car, and that's a great way to keep your travel costs to a minimum.

3. You want to improve your home

If your home needs work, or there's a renovation you've been wanting to make for years, you may be inclined to take out a personal loan to cover its cost. But there may be a more cost-effective way for you to borrow money in that case -- take out a home equity loan or a home equity line of credit (HELOC).

You don't have to use a home equity loan or HELOC for property renovations only. (As with personal loans, you can borrow that money for any purpose.) But if you borrow against your home and make improvements, the interest on the sum you borrow will be tax deductible. Not only that, but you might snag a lower interest rate with a home equity loan or HELOC than you would with a personal loan.

Personal loans are a useful tool, and a good way to cover emergency expenses. But don't take one out for any old reason. It's okay to borrow with a personal loan when a true need arises, but think twice in most other circumstances.

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