If you ask ten finance coaches or advisors whether it’s a good idea to use a personal loan to cover household expenses, the chances are high that nine out of ten–if not all of them–will tell you to avoid it at all costs.
It’s true: when you can avoid it, it’s best not to use a personal loan for household or living expenses. However, in a pinch, say, for example, unexpected home repairs, personal loans can be the only viable choice.
For starters, personal loans are great for situations where you need money fast because some personal loan lenders will deposit the money into your preferred account within minutes, hours, or the same day.
The trick to making personal loans work for you is to weigh the pros and cons of taking out one. That’s why, before applying for a personal loan to cater to household expenses, you should ensure your budget has enough room for repayment without putting undue financial strain on yourself.
Let’s discuss some of these pros and cons:
Pros of Taking a Personal Loan For Household Expenses
Here are the primary advantages of taking out a personal loan and using it to cover household expenses:
1. It can improve your credit score
Making timely payments on your loan will positively affect your credit score’s payment history, which increases your credit score.
Additionally, getting a personal loan can help improve your credit mix, which can be good for your credit score, especially if you have revolving debt.
2. Quick access to funds
Personal loans can be a convenient way to obtain money quickly when dealing with emergency household expenses.
For example, according to Experian, banks and credit unions normally approve personal loans within 1-5 days, with some, like Alliant Credit Union, offering same-day or faster funding. Online-based lenders are super fast, so much so that you can access funding within minutes of requesting a personal loan.
This ease of access to funds makes personal loans a quick way to handle emergency household expenses.
3. Lower interest rates
For someone with a good credit score, compared to alternative credit options like credit cards, secured personal loans can provide more affordable borrowing as they often feature lower interest rates.
For example, according to the Federal Reserve, the average interest rate of credit card accounts with balances was 20.40% in 2022. Comparatively, it is not uncommon for someone with a good credit score to get a secured personal loan at a 3-10% interest rate.
4. No collateral required for unsecured personal loans
To acquire an unsecured personal loan, you do not need collateral. Therefore, you don’t have to put up any of your assets as security for the loan.
This makes personal loans a great way to access funding fast, which can be especially great if you don’t have an asset you can use to get a secured personal loan.
Now let’s focus on the cons:
Cons of Taking a Personal Loan for Household Expenses
The main disadvantages of using a personal loan to cover household expenses are:
1. It may promote poor spending habits
Because personal loans are easier to secure, they can hurt your financial well-being.
For example, when a creditor approves a personal loan, and you get a significant lump sum into your checking account, it can be easier to overspend, especially if the approved loan amount is above the amount you need to tackle your household expenses.
That is why making smart money decisions when taking out a personal loan is the best thing you can do to avoid a bad credit history.
2. High-interest rates
Depending on the lender and your credit score, unsecured personal loans can attract high-interest rates, making them an expensive option for borrowing.
For example, if you have a credit score below 580, you can expect to pay as high as 30% in interest rate, which is a lot.
Source: Investopedia’s personal loan calculator
3. Fees
Some lenders may charge fees for origination, prepayment penalties, or late payments penalties, which can add to the cost of the loan over and above the loan’s interest.
4. Credit score requirements
Unsecured personal loans with ‘manageable’ interest rates often require a good credit score to qualify, which may make them inaccessible for those with poor credit.
Now that you know the pros and cons of taking out a personal loan to cover household expenses, you should know something else: countries have differing personal loan guidelines.
Getting a Personal Loan: Country by Country Guide
Personal loan availability, terms, and conditions can vary by country.
Thus, to save time and get the best personal loan terms possible, ensure you conduct a personal loan comparison using a tool like iSelect before settling on one credit provider. Comparing your options will make choosing a credit provider who meets your requirements and needs easier.
Conclusion
Researching and comparing the available personal loan options is crucial. Carefully scrutinize the interest rates, fees, repayment terms, and other factors that could affect the loan’s overall cost.
More importantly, before applying, ensure you can comfortably manage the loan payments without putting undue financial strain on yourself.
