3 reasons to spend on a personal loan this year

Now may not be the ideal time to borrow.

Key points

• A personal loan offers you great flexibility as a borrower.
• Although personal loan rates are often competitive, you might want to take a different route right now — or avoid borrowing altogether.

There’s a reason so many borrowers are attracted to personal loans. A personal loan lets you borrow money for any purpose, so if you don’t want to be limited in how you use your loan proceeds, this is a good bet.

Plus, you might be able to get a relatively affordable borrowing rate on a personal loan. This especially applies if you have great credit.

But while personal loans certainly have their perks, now might not be the perfect time to get one. Here are some reasons to say no to a personal loan during the latter part of 2022.

1. Borrowing rates are higher

You will generally get a much lower interest rate on the amount you borrow with a personal loan than with a credit card. That said, the Federal Reserve has been aggressively raising interest rates in an effort to slow the pace of inflation. As such, the interest rate you get on a personal loan today may be much higher than what you would have gotten this time last year.

Now the problem is that we don’t know if borrowing is going to get more or less expensive next year. There is reason to believe that the first could occur as rate hikes continue. But if inflation levels start to come down nicely, the Fed could rein in interest rate hikes and borrowing rates could come down in 2023.

At this point, waiting to borrow money is a bit of a gamble. But we know that personal loan rates are higher now than they have been in a while, so that’s something to keep in mind.

2. You don’t need to borrow as much

A great thing about personal loans is that they tend to close quickly. But that doesn’t mean there isn’t work to put one in place. As such, personal lenders tend to impose a minimum borrowing requirement to make this effort worthwhile. And so if you don’t need to borrow a lot of money, a personal loan may not make sense.

Say you need $600. You may find it difficult to get approved for a personal loan under $2,000. In this case, you may want to explore other borrowing options.

3. You have a cheaper choice

A personal loan can be a very affordable borrowing option compared to the other choices presented to you. But if you’re a homeowner, you might be better off taking out a home equity loan if your goal is to get the lowest interest rate possible.

Like personal loans, a home equity loan allows you to use your loan proceeds for any purpose. It’s a big misconception that your proceeds should be used for home improvements or repairs (although many borrowers do, in fact, use home equity loans for this purpose). So you could get the same flexibility at an even lower interest rate.

Taking out a personal loan can be a good solution when you need to borrow money. But for now, you might want to take a different route or, if possible, put borrowing on hold altogether until interest rates start to come down.