There are times when taking out a personal loan can be beneficial. And, there are times when it might not be the best idea. It all comes down to one question: are you using the personal loan to invest in yourself?
Taking out a personal loan can be one way to reach your long-term financial goals. A personal loan might even help you build your credit score.
There are personal loans for home remodeling, going to school, relocating, debt consolidation, uncovered medical expenses, getting married and more.
The ability to access loans through digital channels has resulted in a measurable improvement in economic parity for the unbanked in developing nations around the world.
But, is taking out a personal loan always a good idea? Are there times when you might want to resist?
Taking Out A Personal Loan to Invest in Yourself
Investing in yourself is the only way to reach your financial goals. What does “investing in yourself” mean? It means you have a vision, life goals, a budget, and are tracking your money.
Investing in yourself means that you are saving for emergencies and your retirement. It means that everything you do is designed to improve your financial health and build for the future.
Investing in yourself also means that saving money and reducing debt are priorities in your life.
When might taking out a personal loan be an investment in yourself?
If you have a lot of high-interest debt, such as credit cards and consumer loans, it might be a good idea to take out a personal loan to consolidate your debt.
Credit card transfer is another way to consolidate your credit card debt, but this only works if you can afford to pay off the balance on your transfer card within the special promotional period. Otherwise, you could easily find yourself back in the same difficult financial situation.
If you own a home in certain markets, you may find that it is more to your advantage to remodel rather than sell and buy a new home. In many cases, you might be unable to afford a new home in your neighborhood.
Remodeling to make your home more accommodating to your needs, such as a growing family or adult children moving back would be an investment in yourself.
Taking out a personal loan to create a home office might also be a good idea. Maybe you joined the gig economy to get out of the paycheck-to-paycheck matrix. The extra income you received from your side gig is helping you meet your financial goals.
Sometimes a side gig has the potential to become a new business. You need to start small. Remodeling to create a home office so you can slowly grow your business would be an investment in yourself.
When a Personal Loan Might not be a Good Idea
Need vs. Want
A personal loan can help you make major purchases that you really need, such as uncovered medical procedures, a new car or major appliances. There are even personal loans to help you cover your wedding expenses.
However, if the expenditures are optional and you just can’t afford them with the money you have on hand, taking out a personal loan could hurt your financial health.
It’s important to remember that the loan must be repaid. Before applying, ask yourself is it worth the additional financial burden to buy something you don’t need?
With planning, budgeting and saving you might be able to afford these purchases or excursions without the need for additional debt.
Living Beyond Your Means
If you are already over-extended, taking out a personal loan so that you can continue to live beyond your means would not be an investment in yourself. You will simply be extending the life of your long-term debt.
If you are having trouble meeting your monthly expenses, the first thing to do is look for ways to reduce your spending or increase your income. In previous posts, we’ve talked about the importance of finding those “money sinks”—unused subscriptions, restaurants, coffee houses, utility bills, movie streaming channels, gym memberships, etc.
Find out where your money is going and look for ways to keep more of it working for you.
Bottom line: Before taking out a personal loan, ask yourself: is this an investment in me or not?