By Clare Yates
5 min read
Here’s when a personal loan might be a smart option:
You’ve got a clear plan: You know exactly what the loan is for, how much you need, and how you’ll repay it.
You can afford the repayments: Your budget has room for the monthly cost, even if other costs go up (like an increase in interest on your mortgage}.
You’re consolidating debt: If the loan has a lower interest rate than your credit cards, it could help save money and simplify things.
You’re avoiding dipping into savings: Maybe you’ve got savings set aside for emergencies, and you'd rather keep them untouched. But do consider how much interest you’d pay on a loan versus the interest you are earning on your savings.
And here’s when you may want to think twice before taking out a personal loan:
You’re already struggling with debt: Another loan could pile on more pressure, especially if you're using it to stay afloat.
You’re not sure how you’ll repay it: If the monthly cost is a stretch or your income’s unpredictable, that’s a red flag.
You’re tempted to overspend: If the cash might lead to impulse purchases, it could cause more problems than it solves.
You’ve not checked other options: Depending on your goal, there could be cheaper or more suitable alternatives, like borrowing the cash you need from a relative.
The upsides of a personal loan
Fixed monthly payments: What you see is what you get. Your repayments stay the same each month, so it’s easy to plan ahead.
Lower interest than credit cards: If you’ve been relying on credit cards, a personal loan could work out cheaper – especially if you’ve got a decent credit score.
Spend it your way: Unlike some loans, you’re not tied to a specific use. Want to spruce up the kitchen or cover a surprise vet bill? Totally up to you.
No need to put anything up as security: Most personal loans are unsecured, so you don’t need to risk your home or car to get the money.
Fast and (mostly) fuss-free: Once you're approved, the cash can be in your account within a couple of days or even sooner. Handy if you’re in a hurry.
Might help your credit score: If you make every payment on time, it could give your credit history a boost.
The downsides to watch out for
There might be extra fees: Some lenders charge upfront fees to set up the loan, and you might get hit with a charge if you pay it off early.
It’s still debt: Sounds obvious, but it’s worth saying – you’re borrowing money, and that means another monthly commitment.
Interest rates aren’t the same for everyone: Those headline-grabbing low rates? They’re usually for people with top-notch credit. Others may be offered something higher.
Your credit score might dip at first: Applying for a loan usually involves a credit check, which can cause a small, temporary drop in your credit score.
It’s easy to borrow more than you need: Tempted to round up “just in case”? That can lead to paying back more in interest… not ideal.
Longer loans can cost more overall: Lower monthly payments might sound good, but stretching the loan out could mean paying more in the long run.
What are some alternatives to a personal loan?
Personal loans can be really helpful, but they’re not always the best fit for every situation. Depending on what you need the money for, here are a few other options worth thinking about:
0% purchase credit cards: If you’ve got a decent credit score and just need to spread the cost of something over a few months, a 0% card could be cheaper, as long as you pay it off before the offer ends.
Money transfer credit cards: These let you move money straight into your bank account (usually for a small fee), which you can then use however you like. If you grab one with a 0% interest period and pay it off in time, it could work out cheaper than a loan for smaller amounts.
Overdrafts: Handy for short-term borrowing, but can get expensive fast. Good for emergencies maybe, not for long-term debt.
Family loans or support: Not an option for everyone, but worth exploring if a relative is happy to help and you can agree on clear repayment terms.
Things to ask yourself
The bottom line? A personal loan can be a really useful way to get on top of your finances – whether you’re clearing high-interest debt, covering a big cost, or just want some breathing room. But like any form of borrowing, it needs a bit of thought.
Ask yourself:
Do I really need it?
Can I comfortably afford the repayments?
Have I checked for fees?
Is a better option open to me?
If everything checks out, it could be a smart move. Just go in with a clear head and avoid borrowing just because you can.