Is a Personal Loan Always the Best Option?

A personal loan can be the answer for many people when unexpected expenses or sudden consumer desires come up. In lots of cases, however, taking out such a loan may not be the best solution. You need to carefully weigh the costs of taking on more debt with the benefits of receiving the funds from a personal loan. In fact, Gail Hillebrand who is senior attorney for the Consumers Union explains, "In this economy, most households have too much credit already." Before you decide to pursue a personal loan, you should consider checking out some alternatives such as those discussed below.

Use Your Savings

If you've been conscientiously putting money back for a rainy day, you may want to put those funds to work for you now. Some financial advisors may warn against using your savings except as a last resort, but the reality is that withdrawing the money instead of taking out a loan may save you in the long run for two reasons.

Reason #1 - You won't owe interest - When most people think about the cost of a loan, they usually only consider the principal amount. Unfortunately, interest rates can actually cause the amount you owe to double, particularly if the repayment period is stretched out.

Reason #2 - You may not spend as much - If you have to pay for what you want out of your savings, you may be more likely to hunt for a good deal than if you took out a loan. A good example of this are weddings. Statistics show that women who take out a loan to cover the costs of their weddings end up paying significantly more than necessary because they don't take the time to shop around. They are also more likely to be dissatisfied with what they receive since most expensive does not always mean the best.

Keeping money on hand as a financial cushion is always a good idea but if using it can save you money now and prevent you from taking on more debt, then it's worth considering.

Borrow from Friends or Family

Maybe asking your parents or best friend for a loan is something you'd rather not have to do, but it is a legitimate and usually preferable alternative to taking out a personal loan. For one, you're less likely to use the money frivolously. When people take out a loan, they often take out more than what they really need and, therefore, end up paying back more than was necessary. When you borrow from a person instead of a financial institution, you will be less likely to abuse the privilege.

Additionally, most family and friends won't charge you interest. While banks and other financial institutions want to profit from your need for money, those close to you will most likely to be acting out of the goodness of their hearts and won't be looking for anything more than a thank you.

Keep in mind that no matter who you borrow from, you do have a responsibility to pay back the money in a reasonable amount of time. It may be a good idea to outline your arrangement in writing so there's no confusion about when or how you'll give back the money.

Put Off the Purchase

Unless you need a personal loan for an emergency expense, chances are that you can delay the purchase or the home improvements until you can save up the cash to cover them. Studies have found that 60% of people who incur debt to buy something regret the purchase. So they ended up paying a great deal more for something they really didn't end up wanting in the long run.

If you do need to make a purchase, then consider using layaway or other payment arrangements instead of taking out a personal loan.

Personal loans aren't for everyone and there are reasonable alternatives which can help you get what you need without forcing you to take on extra debt. Once you've weighed all the options, however, you can make an informed decision that you won't regret down the road when it's too late to turn back.

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