Whether you should take out a personal loan will ultimately come down to your situation and financial goals.

If you do have a real need to borrow, be smart about it and find the product that makes sense — it won’t always be a personal loan. Sometimes, it’s better to delay a purchase, save and pay in cash instead of burdening yourself with more debt.

Here are five times you should reconsider taking out a personal loan and turn to other options instead.

1. Paying For College Or Refinancing Student Debt

Figuring out how to pay for college isn’t easy. Personal loans are one option, but they shouldn’t be your first choice.

Most students will get a better deal with federal or private student loans than they could with a personal loan. For example:

• Federal student loans don’t require a credit check and offer robust borrower protections.

• Rates on federal and private student loans are usually lower than personal loan rates.

• Student loan interest is tax-deductible, but personal loan interest is not.

Those benefits apply if you’re trying to refinance student debt as well.

There are benefits to using a personal loan to pay off student loans. You can:

• Remove a co-signer from the debt

• Consolidate multiple loans into one payment

• Get a better term or rate

But those benefits aren’t limited to personal loans. You’ll also get them — plus a few more — when you refinance student debt to replace it with a new student loan. Private student loan refinancing tends to deliver significantly lower rates than personal loans, and you still get that student loan tax deduction.

2. Financing A Car

I recently bought a car and opted to finance it with a car loan. It’s the first debt I’ve taken on since paying off my $107,000 student debt.

It helped that I qualified for a great auto loan rate — better than I’m likely to find offered on a personal loan.

Unlike an unsecured loan, an auto loan is secured debt that’s guaranteed by collateral — typically the car you’re purchasing. If you’re unable to repay the debt, the lender can repossess the car and sell it to recover the money it lent you.

Since auto loans are structured this way, there’s less risk to the lender. And because there’s less risk, auto loans often are easier to qualify for and carry lower interest rates than personal loans. The Federal Reserve Bank’s most recent survey of commercial bank interest rates in the second quarter of 2017 shows just how big the gap can be:

• Average 60-month car loan APR: 4.24%

• Average 24-month personal loan APR: 10.13%

Personal loan rates are 138.92% higher than those offered on auto loans, and the term is less than half. Basically, with a personal loan, you’d have to pay more than twice as much interest and pay off the loan in less than half the time. For car buyers, it’s simply not a good deal.

3. Consolidating Smaller Debt

One of the most popular uses for personal loans is consolidating or refinancing debt. A personal loan used to consolidate debt can result in simpler money management and a lower interest rate, which will save you money on interest payments.

However, not everyone will save by consolidating credit cards with a personal loan. Or the savings might be so small that the payoff simply isn’t worth the hassle.

For instance, you might be counting on that low rate the lender advertises. But the rates you qualify for could be significantly higher than the marketed APRs (notice lenders say you can get rates “as low as” these). Consolidating debt with a personal loan also can add origination fees and other costs to your balance.

If you have a smaller credit card balance you could knock out with 12 to 18 months’ worth of concentrated effort, a personal loan might not be your best move. Debt consolidation could be too much hassle for little reward.

Instead of using a personal loan to refinance small-balance debt, consider performing a balance transfer with a zero-interest credit card. You also can up your payments and knock out the balance without moving it to another loan or credit card.

4. Paying For A Vacation

Most people are too willing to borrow to finance their getaways, according to a recent survey from financial planning company LearnVest. Three out of four Americans (74%) say they’ve gone into debt to finance a vacation, borrowing $1,108 on average.

Here’s the thing: Vacations are non-necessary purchases you can save and plan for. If you have to take out a personal loan or use a credit card to pay for vacation costs, that’s a red flag that you’re buying something you can’t afford. Even worse, interest charges add to vacation costs. So, by definition, you’re paying more for your trip than it’s worth.

Instead of using a personal loan to pay for a vacation, plan a less expensive trip closer to home that you can pay for in cash. Or delay the expensive vacation and make a plan to save up for it.

5. Covering Expected Major Expenses

When you’re facing an emergency or time-sensitive expense, a personal loan can be a cost-effective way to borrow the funds you need.

Personal loans are often used to fund home improvements, for example. Some home repairs, from a leaky roof to a failing furnace, can’t be put off. In those cases, a personal loan can help you fund repairs to maintain a functional home if your on-hand cash won’t cover all the costs.

But there’s a big difference between an unexpected expense and one you simply failed to plan for. Remodeling your kitchen, for example, can wait. Living with an outdated kitchen for a year or two while you save up is worth it to avoid unnecessary debt.

You also might be considering a personal loan to pay for a wedding, a cross-country move, starting a family or another major life event. If you know you want to take these major life steps in the future, that calls for a savings plan — not a personal loan application.

Think Twice Before Taking Out A Personal Loan

If you’re thinking of taking out a personal loan, make sure it will further a financial goal rather than set you back. Calculate your personal loan payments to ensure you can fit them into your budget.

Lastly, if you can wait to make the purchase and save instead of taking out a personal loan, do so. Take a long view of your finances, and you can set today’s money priorities to match your long-term goals. With some proper planning, budgeting and saving, you can set yourself up for a debt-free future and lasting wealth.

Then there are personal loans for funding -- you guessed it -- something personal in nature. You can use the money towards just about anything and everything (as long as it’s not illegal). Personal loans are unsecured, relatively easy to obtain, and usually available in several amounts, from small to jumbo size.

Sounds like a pretty sweet arrangement, having the freedom to access some cash for just about anything you want. But if you’re thinking of taking out a personal loan, get to know it a little better first.

There are some obvious advantages and disadvantages, but you need to know when a personal loan is worth borrowing every penny, and when it might not be the best idea, putting you at risk of debt or default.

A look at personal loans: The good and the bad

Before setting out on the personal loan front, first consider some of the pros and cons and weigh some of your options.

Personal loan advantages

Personal loans are unsecured. Secured loans, like mortgages, auto loans or payday loans require some form of collateral (property, like a house, car or other item) in case you go into default and the lender needs something of value to compensate for the loss. Personal loans, on the other hand, are unsecured, so putting up collateral is not necessary.

Generous loan amounts. Personal loans come in all sorts of varying amounts; you can get one starting in the vicinity of $1,000, all the way up to $100,000.

Fast application/approval time. Since personal loans can be obtained through a variety of independent and online lenders, expediting approval within 24 hours is not unlikely, since the general turnaround process is more streamlined than that of a traditional bank or financial institution. Most personal lending calls for a less rigorous application process with less paperwork needed.

Personal loan disadvantages

Interest rates may tend to be on the high side. Because personal loans are usually unsecured, they’re perceived by lenders as riskier, so higher interest rates may apply. Personal loan APRs tend to be on the double-digit higher side even for borrowers with stellar credit -- and we all know that inflated interest rates may raise the chance of making payments unaffordable and missing them.

In a survey of personal loan interest rates offered by credit score tier, online lender LendingTree noted that borrowers with excellent credit scores (between 740 to 850) received a median APR of 8.18% to 9.66%, while consumers with poor credit scores (659 and under) were saddled with interest rates starting at 23.99% up to 30.02% -- roughly one-quarter of their original loan principal. (And those rates are being generous; many personal lenders will mask a portion of their high interest rates behind origination fees and other upfront costs passed onto the customer.)

Loan periods tend to be shorter and accelerated. Fixed- and variable-rate mortgages traditionally have terms of 15 or 30 years. Standard student loan repayment plans are about 10 years. Even most auto loans reside in the 48-to-72-month period. Personal loan repayment periods may tend to be on the shorter side, often three to four years or less, placing pressure on borrowers to pay up early.

Lenders can still sue you. Though you have no obligation to secure your personal loan with some sort of collateral, a lender can still pursue legal action against you upon delinquency or default, and place a lien on your assets to secure repayment. Go to court, and you could get hit with court/attorney fees, plus other charges. And if a judgment is issued against you, it’ll show up on your credit report.

Personal loans: Yay or nay?

There’s no one-size-fits-all scenario with personal lending. Noting some of these possible benefits and drawbacks, there are some instances where a personal loan may benefit you, and some where it might not.

When to get a personal loan

Reducing/consolidating credit card debt. With the average national credit card interest rate hovering around 15.07%, it’s no surprise why so many people may find themselves in debt. Using a personal loan to pay off or consolidate your credit card debt can be the more cost effective option, especially if you can land an APR on your loan lower than on your cards.

Paying off medical bills. Out-of-pocket costs can rack up if you visit the doctor’s office without a health insurance plan, quickly sending you on the fast track to debt. A lower-interest personal loan can help pay off some of your medical expenses. Thankfully, you’ll have a bit of time to search for the right loan, since medical debt won’t appear on your credit report until 180 days after you’ve been billed.

Home improvements. If you want to make improvements to your home to build equity, but don’t have enough equity just yet to borrow a line of credit against the value of your house, a personal loan could do the trick to pay for those renovations. In this case, when your mortgage payments prevent you from freeing up some discretionary cash to use towards a remodel project, a personal loan is a better, more feasible option than dipping into your savings account or putting it down on a credit card.

Major life events. Some expenses are unexpected, others are so cost prohibitive that there’s no time to save up for them, and others still are a combination of both. You can pay for significant life events, like a major move cross country, or planning and paying for a funeral, with a personal loan. (Just make sure that if you’re moving for a new job, your income allows you to make your loan payments -- or, that estate plans cover as much as possible before borrowing too much.)

For building credit. If you don’t qualify for a credit card and are looking to boost your credit score, a personal loan could do the trick. Take out a small amount strictly to pay it back, not to spend on anything. The loan should diversify your credit mix, improve your credit utilization ratio, and reflect timely payments on your credit report.

When not to get a personal loan

Weddings, vacations and the like. Many sources will encourage taking out a personal loan to finance a wedding, but think twice before borrowing for your nuptials, next summer’s family vacation, or other one-time "experience" buys. The rationale? These are short-term purchases that only create more debt. Using a personal loan for longer-term financial scenarios, like paying down debt or home improvements, are the more practical options, since the former is about improving credit in the near future; the latter, increasing equity.

Remember that personal loans are still debt. Using one to finance anything your heart desires, from a big-ticket purchase to an emergency expense, or towards debt, doesn’t ignore the fact that it’s still something you need to pay off. Follow these tips:

• Don’t borrow more than you need. Even the lowest personal loan interest rates can be high, and may send you further into debt if your balance is hard to manage.

• Practice good credit behavior. Don’t focus only on your personal loan. Incorporate it into your personal or family budget along with other bills, like your credit card or other expenses (like your mortgage or auto loan). Making a personal loan part of your revolving and installment debt, rather than the focal point, keeps your credit healthy.

• Search for the right lender. See what kinds of personal loan offerings are at your local bank branch or credit union; nonprofit credit unions often provide lower interest rates. Check several online lenders, too, like Lending Club, Prosper or Earnest, marketplace-based lenders where money is funded by members and investors, not banks. It might be the answer to landing a personal loan with a lower interest rate you could have hoped for.

Good and bad uses for a personal loan

What you use a personal loan for is usually completely up to you, unless the lender has specified parameters for how the loan can be spent. With that in mind, you should also know that a personal loan is a financial tool that should be used responsibly, with caution, and for good reasons.

Good uses for a personal loan

A personal loan can be useful in your financial strategy if you use it responsibly. A number of good reasons exist for taking out a personal loan, including:

• Education expenses.

• Purchasing or renovating a home.

• Debt consolidation.

Most financial experts suggest that taking out a loan for an appreciating asset is a good use of debt. For example, a student loan that will increase your future earning power or a mortgage loan that allows you to own a home are good reasons for taking out a personal loan.

A personal loan can also be an effective alternative to high-interest credit cards. Many consumers charge their purchases with a credit card and treat that charge as a loan, carrying over their balances from month to month. If you've already amassed a large amount of high-interest debt, taking out a debt consolidation personal loan might be a good idea.

A debt consolidation loan bundles your existing debts into one package that allows you to make one monthly payment instead of many. If you can get a lower interest rate on the debt consolidation loan, the loan might enable you to pay off your debt more quickly. For example, if you have credit card balances with an average 20% APR, you could take out a no-fee debt consolidation loan with an average interest rate of 13% APR. By doing this, you'll save 7% APR in interest charges.

Bad uses for a personal loan

Although you can borrow money to use in whatever way you want, you should exercise caution when using a personal loan. Some poor uses of a personal loan include:

• Vacations.

• Consumer goods.

• Lavish wedding.

A personal loan shouldn't be used to increase your spending on unnecessary expenses. Consider the fact that a vacation, wedding and material goods last for a short period of time; but if you don't pay it off quickly, the debt can last for years. By taking out a personal loan for consumable debt, you're sacrificing the opportunity to build up your savings or retirement investing -- and hurting your own financial future.

Depending on your financial habits, a personal loan could be a crutch for someone who has a problem with excess spending. Some individuals might continue to add to their debt as they reduce their total loan payments. If you're susceptible to this tendency, you're better off just paying off your existing debt as quickly as possible.

What to consider when taking out a personal loan

Most personal loans are unsecured or signature loans, which don't require a security deposit or collateral. Because of this lack of collateral, the risk is greater for the lender. Thus, interest rates on unsecured or signature loans are usually higher than those on secured loans. Also, the lower your credit score, the higher interest rate you'll pay, because a lower credit score indicates you are a risk as a borrower.

When considering the option of a personal loan, figure out your debt-to-income ratio. For example, if you make $4,000 per month and owe $1,000 in monthly debt payments, your debt to income ratio is $1,000/$4,000, which is 25%. Although there's no such thing as a perfect debt-to-income ratio, a lower ratio is better than a higher one: If your debt payments are too high, after making your payments, you won't have enough cash to meet your day-to-day expenses.

You should consider the details of the various personal loans available to you. Consider whether the personal loan is secured or unsecured, as well as the following factors:

• Interest rates: Interest rates are additional payments -- on top of the amount borrowed -- that you owe the lender for the privilege of borrowing. A personal loan with a lower interest rate and a shorter term will help keep down your total repayment amount. If you choose to take out a personal loan, choose a lender offering the lowest interest rate. The better your credit score, the lower your personal loan interest rates will be.

• Fees: Some lenders offer no-fee loans, which means there's no origination or other borrowing fee. The only liability you'll encounter is the repayment of the sum borrowed and the interest payments. Watch out for personal loan companies that charges high fees.

• Terms: In general, it's preferable to take out a shorter-term personal loan than a longer-term loan. With a shorter-term loan, you'll end up paying less in total interest charges.

• Lender: Vet the lender for your personal loan. Understand the loan fees and credit score required by the specific lender. Read reviews to ensure that you're choosing a reputable firm.

Alternatives to a personal loan

Before committing to a personal loan, you should consider alternative sources of capital. Here are a few suggestions for other sources of funds:

Low- or no-interest credit cards: Make sure to read the fine print to avoid accruing additional debt and interest payments. Also, it's wise to pay off the charges as quickly as possible to minimize the interest expenses.

Friends or family: You might consider borrowing from a family member or friend if you need funds for a short period of time and can't access a personal loan. However, this option comes with the danger of negatively impacting the relationship.

401(k) loan: Another possible option is to borrow from your 401(k) account. The disadvantage with a 401(k) loan is that you're compromising your future retirement by withdrawing funds from the account. If you take money out of your 401(k) early, you won't be growing your money for your future, and you'll miss out on accruing interest. You also could be subject to fees and penalties. You should only consider borrowing from your 401(k) if you're in a dire financial situation.

Be selective about using a personal loan

A personal loan can be a helpful solution for some financial situations. If you're considering taking out a personal loan, ask yourself these questions first:

• Can you reduce your total debt interest rates with a personal debt consolidation loan?

• Are the personal loan payments within your budget?

• Will the personal loan alleviate a potential disaster, such as the inability to pay a big tax bill?

If you answer yes to one or more of these questions, then a personal loan could be right for you.

Although you are allowed to use a personal loan for anything, look at both the advantages and disadvantages of the loan. The fact that personal loans don't require collateral is beneficial. And if you make your payments in a timely manner, a personal loan could help improve your credit profile.

On the other hand, whenever you borrow money, you're risking the possibility that you won't have the cash to pay the loan back on time, thereby hurting your credit. Do your research and evaluate your personal financial situation before taking out a personal loan. If you take out a personal loan, make sure it's for an important reason -- and make sure to pay the funds back on time.

Even used cars cost upward of $19,000, on average, and a new car can cost much more. Unless you have that money available in savings, you’ll probably have to take out a loan.

Which brings you to an important question: Are you better off taking out an auto loan or a personal loan to buy a car?

This guide breaks down the decision, helping you figure out which option is better for your specific needs and how to find the right loan at the lowest possible cost.

Can you use a personal loan to buy a car?

The short answer is yes, you can.

Most personal loans are provided without any restrictions on what the money is used for. This can be quite convenient, since it gives you a lot of flexibility. But it can also lead to problems, since you are free to use the loan to finance spending beyond your means.

In most situations, an auto loan is preferable to a personal loan when buying a car, This is true for a few simple reasons:

• It is easier to qualify for an auto loan.

• Your interest rate will likely be lower.

• You’re less likely to have to pay other loan fees.

In other words, it’s typically easier and cheaper to get an auto loan than a personal loan.

Still, it’s worth shopping around before you ever set foot on a lot.

All auto-loan credit inquiries made within 30 days, so you won’t be penalized for getting a variety of quotes on a variety of different loans.

And getting preapproved for a loan before you go to the dealer allows you to negotiate from a position of strength. With a firm loan offer in hand, you both know your budget going in and are in a better decision to negotiate, since the dealer will be motivated to try to beat the offer or risk losing your business.

Typically this works best for those with maxed out credit cards or those seeking to consolidate debt with abnormally high interest rates. Those with good credit scores or healthy credit card history won’t typically see any improvement to their scores with this method. If you’re planning to try using a personal loan to improve your credit score or pay off credit card debt, weigh the pros and cons.

How Does a Personal Loan Affect My Credit Score?

"When it comes to improving credit scores, a personal loan may be a viable option for reestablishing creditworthiness when the proper steps are taken," Marco Carbajo, Founder of BusinessCreditBlogger.com, said. "For a personal loan to have maximum impact to an individual’s credit scores, you should focus on three key things: maintaining a positive payment history, paying more than the minimum amount due each month and reaching a low balance owing (below 30%) as soon as possible." Also be sure to look for a lower interest rate than what you’re paying now and a repayment period of three to four years. If you adhere to these conditions, a personal loan might be worth your time.

A personal loan can consolidate credit card debt and improve your credit score for several reasons:

• A personal loan is an installment loan so debt on that loan won’t hurt your credit score as much as debt on a credit card that’s almost to its limit, thereby making available credit more accessible

• A personal loan can also help by creating a more varied mix of credit types

• A personal loan can decrease debt more quickly

While it can be helpful for consolidating debt, be sure to treat a personal loan with caution. They can be a great way to pay off expensive credit card debt. You would still owe the same amount of money, but your credit scores are likely to improve. However, if you’re using the loan to pay off credit card debt, don’t run up new balances on those cards.

If you need some direction about financial challenges, the Veterans United Lighthouse Program works with veterans and service members to help overcome financial hurdles and get on the path to homeownership. The best part is the program is a free resource.

Secured vs. Unsecured Personal Loans

Decide whether a secured or unsecured personal loan would be best for you ahead of time. Here’s how each loan fares in terms of collateral, repayment period and interest rates:

Pros of Secured personal loans: Longer repayment time, Lower interest rates

Cons of Secured personal loans: Must provide collateral

Pros of Unsecured personal loans: No collateral necessary

Cons of Unsecured personal loans: Higher interest rate, More difficult to obtain

In general, secured loans are better for the long term, and unsecured loans are more beneficial in the short term. Keep in mind, that there are other options to improve your score, and taking out a personal loan is not for everyone.

What to Expect

According to Anthony Gaalaas, the “Credit Expert,” you can take out a personal loan starting at $500, depending on the bank. When the loan appears on your credit report, your credit score might drop for the first month, which Gaalaas says is normal. After that first month, your credit score should start to improve if you make payments on time.

When you’re approved for a personal loan and accept the terms, the money can be sent directly to your bank account, or you can get the money by check.

Loan terms are usually pretty simple:

There is a fixed term. You know when the debt is paid off, and it is almost always less than 5 years. (Pay the minimum due on your credit card, and you could still be paying 30 years from now). There usually aren’t pre-payment penalties, but some loans do have them, and you should check for that before you accept the loan.

There is a fixed interest rate. Your monthly payment and interest rate stay the same for the life of your loan. Credit cards will increase the interest rate on your existing balance if you become 60 days past due. And they can increase your interest rate on future purchases at any time.

Personal loans aren’t without their faults

Even personal loans can have their own tricks. While we like them better than borrowing with credit cards, you need to watch out for:

1. Insurance sold with the loan.
2. Pre-computed interest
3. The origination fee
4. Pre-payment penalties

Oddly enough, these tricks might not be buried in fine print. In fact, your insurance salesman might mention a few to convince you they’re necessary for your protection. We want you to understand what these four terms mean so you can decide if you need them, and if you do, how to find options that won’t cost you hundreds or thousands in extra fees.

How To Avoid The Tricks

There are a number of lenders out there that do not bundle insurance, do not use pre-compute interest contracts, do not charge an origination fee and do not have pre-payment penalties.

We recommend you shop online to find lenders without those tricks and traps. A good place to start the search is with LendingTree, our parent company. With one, short online form LendingTree will perform a soft credit pull (with no impact to your score) and match you with multiple loan offers. Interest rates can be below 6% for people with excellent credit. And because dozens of lenders participate in LendingTree’s program, you may also find lenders willing to accept borrowers with less than perfect credit.

Now we will explain, in more detail, the tricks that you can find hidden in some personal loan contracts.

Trick One: Insurance

We all want to protect our families from the unexpected and insurance is a great way to do just that. Similar to how we recommend planning in advance for your debt (and looking for the best deal), you should do the same with insurance. However, many personal loan providers will try to add an insurance sales pitch at the end of a loan closing. The two most typical types of insurance are life insurance and unemployment insurance.

For life insurance, a typical sales pitch would sound like this: “for just the cost of a can of soda a day, you can make sure you children never have to worry about this debt if you die.” Beware these high-pressure sales tactics. The value of these add-on policies is almost always outrageously bad.

To protect your family, you should think about a good term life insurance policy that covers not just your personal loan, but all of your needs. Do this search separate from the loan transaction.

Unemployment insurance could be a bit more compelling (because, unlike term life insurance, it is difficult to buy a policy separately that would make loan payments on your behalf if you lose your job). I have seen people benefit from these policies. But you need to do the math. How much does it cost per month? So long as you don’t have a high risk of losing your job in the next 6-12 months, you are almost always better off saving the money (rather than paying the premium). There are also a ton of limitations to the amount of the loan payment that can be made (and the length of time that it will be paid). You should ask them the following questions:

1. How much does this cost a month?
2. What are the requirements for me to be able to claim?
3. How much would it pay and for how long?

When you ask those questions, you will likely see that the policy being offered is poor value, and you are better to just save the money yourself.

Trick Two: Pre-Compute Interest

This one is a bit confusing. So, we will make it simple. Pre-compute interest is a bad deal. Avoid it. And don’t be afraid to ask if it is being done to you.

It is a complex way of calculating interest – and the entire reason it exists is to make sure that you pay more interest in the early months/years of your loan. So, if you pay off your loan early, you will end up paying a higher interest rate than the rate quoted.

If you take out a loan with a three year term, and you take the full three years to pay back the loan, then there is no difference between a normal loan and a pre-compute loan. But, if you pay off the loan early, then you will pay more interest. Advertising is particularly misleading if there is a promise of “no prepayment penalty” because interest is charged according to the “precompute” method.

How does precomputed interest work?

In a normal loan, interest will accrue every day at the agreed rate. If you want to pay off your balance, then you just need to pay back the balance of the loan and any interest that has accrued since your last payment. Simple.

In a pre-compute loan, the total amount of interest that you would pay during the entire term of the loan is calculated and added to the balance up front. So, if you borrow $100, and you will pay back $50 of interest during the loan – then your balance becomes $150. If you pay off your balance early, then an interest refund is calculated. The interest refund is calcuated using the Rule of 78. This is yet another complicated way to make sure you are charged more interest up-front. If you want to learn how the calculation works, visit this site.

Bottom line: don’t be afraid to ask if they calculate interest using the “pre-compute” method. If they do – don’t be afraid to walk away. Especially if you think you are going to pay off the loan early.

Trick Three: Origination Fee

Most personal loans charge an origination fee – so there is really no avoiding it. To see if you are getting a good deal, make sure you compare the APR of a loan, not the interest rate. An APR includes the origination fee, and it assumes that you do not pay off the loan early.

There are 2 ways that people get stuck with the fee:

1. You don’t realize the fee is deducted from the loan amount. If you need to borrow $10,000 and there is a 3% fee, then make sure you borrow $10,309.28. The 3% fee would be deducted and you would end up with $10,000 of loan proceeds.
2. You don’t get a refund if you pre-pay. In the example above, if you paid off your loan one day later, you would not get the fee refunded. So an origination fee is like a disguised prepayment penalty.

The APR of a personal loan (including the fee and interest rate) can be well below a credit card interest rate (and it can save you a lot of money). Just make sure you understand the fee and compare the APR.

Trick Four: Prepayment Penalties

There are indirect ways of charging a prepayment penalties (pre-compute interest and origination fees). And then there are direct ways: a prepayment penalty. Most lenders do not charge this, so you should be able to avoid it completely. Just make sure you ask if there is a prepayment penalty.

Personal loans are great, if you do the research

With a personal loan, you can have a fixed interest rate, fixed payment and fixed term. If you compare APRs, then you will be making the right decision. Don’t just jump into picking a personal loan and end up taking out a pre-compute loan, with three add-on insurance policies and a big origination fee – only to refinance the loan three months later. These are sub-prime tricks that can dramatically increase the costs.

If you borrow for 36 months and pay it off in 36 months, then you are in good shape.

At a time when many Americans are simply trying to make ends meet, a personal loan can offer a convenient solution to several financial challenges. Here are three common scenarios in which taking out a personal loan can be a smart solution.

You want to pay off high-interest debt such as a payday or car title loan

As a result of a past financial emergency, you might have had to take on a loan or other debt at extremely high interest rates. If that is the case, our NEA Personal Loan might be the correct product for you as it features a fixed rate and set term that will not change. In addition, consolidating multiple debts into one personal loan can simplify your finances substantially and may allow you to save on your monthly loan payments.

You want to avoid the “minimum” trap

Personal loan payments are structured so you can pay off your debt efficiently and affordably, which can save you money. The reason: each payment you make goes toward interest and principal.

Putting money toward the principal right from the start can avoid extending the life of your loan, which helps keep the cost of borrowing from ballooning as can happen when a big expense is placed on a credit card as the minimum payments contribute only a small amount to reducing the principle owed to the bank, which means your debt can keep piling up.

You want to stick to a budget

The payment terms on a personal loan are fixed, which makes it easier to find a repayment schedule that works for your budget. This makes a personal loan a convenient way to deal with unplanned expenses, such as medical or dental bills, home repairs or automotive fixes.

You also can use a personal loan to spread out the cost of major expenditures, such as funding a wedding or buying new appliances, in a way that can help you stick to your budget.

"It's certainly an option you don’t want to ignore," says J.J. Montanaro, a certified financial planner professional with USAA.

Personal loans have become a fast-growing financing option for consumers, and demand continues to rise.

TransUnion found the number of people with secured and unsecured personal loans stood at 27.34 million at the end of the 3rd quarter of 2015, up 18% from 22.5 million in the 3rd quarter of 2013.

Pay back your debt in installments

With a personal loan, you borrow a certain amount of money for a certain period of time, and pay it back in regular monthly installments.

Sometimes, the loans are unsecured, which means you don’t have to put up collateral, like a house or car. The rate you pay is based on your credit history and credit score.

Along with traditional banks and credit unions, you also can find personal loans at online banks, such as Discover; online nonbank lenders, such as SoFi; and peer-to-peer lenders, such as Lending Club.

The pros of personal loans

A personal loan can be a good way to consolidate existing debt, such as credit cards, says Kathryn Bossler, a financial counselor at the nonprofit GreenPath Debt Solutions. “You’re essentially refinancing. You may be able to lower your monthly payment and interest rate.”

As of November, the last month for which figures are available, the Federal Reserve reported the average rate on a 24-month personal loan was 9.7%, while the average rate on a credit card that was assessed interest was 13.7%.

Some personal loans carry rates of 6% or 7% for the most creditworthy consumers.

If you’re trying to pay down several credit cards, you may be able to roll all your bills into a personal loan, so you have only 1 monthly payment to keep track of, Bossler says.

Montanaro says that another advantage with a personal loan is you pay a set amount for a specific length of time. “One of the things I like is that it gives you a clear beginning and end to knocking out your debt. You can see the light at the end of the tunnel,” he says.

Expect a quick decision on whether you’re approved

The loans are also easy to apply for, compared with a mortgage or home equity line of credit, and you’ll get a quick decision as to whether you’re approved, Montanaro says. If you are, the money will typically show up in your bank account within a few days.

If you need a way to pay for such things as an unexpected car repair or medical bill, or even finance a big expense such as a wedding, a personal loan often will have a lower interest rate than a credit card advance. The average rate on a cash advance is 23.53%, according to CreditCards.com.

The cons of personal loans

If you use the loan for debt consolidation, you need to remember "you’re not paying off debt, you’re just transferring it from one type of debt to another," Bossler says.

And, if you transfer your credit card bills to a personal loan, there’s always the chance you might charge new debt on your credit cards. A personal loan "provides the opportunity to dig yourself out of a hole. It also has the potential to become a bigger hole," Montanaro says.

While you may receive a mailing that mentions a great rate for a personal loan, "only the best qualified customers are going to get the teaser rate,"Bossler says.

Some personal loans carry much higher interest rates, so it’s imperative that you read the fine print and understand the exact terms of the loan that you’re considering.

Does a loan fit into your budget?

You also need to be sure that the monthly payment fits within your budget, Bossler says. Before taking out a personal loan, compare the loan rates being offered. Note that you may be charged an origination fee by the lender, which typically ranges from 1% to 5% of the loan amount.

Some consumers shifted to personal loans during the recession, when home equity loans and lines of credit dried up, Montanaro says. As interest rates climb in 2018, home equity loans might not be as readily available as they have been in recent years. You may consider the route of a personal loan instead.

1. Consolidate credit card debt

This is a common use for a personal loan. You borrow enough to pay off multiple bills or credit card balances. You’ll reduce your bill paying chores and can potentially save on interest and finance charges if your personal loan rate is lower than finance charges and fees on existing debts.

2. Pay off uninsured medical bills
   
   Failing to pay medical bills can wreck your credit within a few months. Medical offices typically sell unpaid accounts to collection agencies that report past-due accounts to credit reporting companies. If you owe a lot, collection agencies may seek court judgments against you. Taking out a personal loan to repay unpaid medical debt can be worthwhile if maintaining or rebuilding credit is important to you.
   
   
3. Pay veterinary bills
   
   Pets, like people, can have accidents or get sick. Emergency veterinary treatment can rack up thousands of dollars in debt in one occurrence. Follow up treatment and meds may be needed after the initial event. Most vet clinics require payment up front, so you may need to use a credit card and later pay off the balance with a personal loan.
   
   
4. Replace or repair lawn care equipment, your grill and build or refresh an outdoor living area
   
   Outdoor living is fun, but not if your lawnmower is broken and your dog ate your patio furniture. Consider using a personal loan to deck out your deck and outdoor kitchen, or add a water feature to your back yard.
   
   
5. Clean and refurbish your in-ground pool or spa
   
   Expecting guests this summer? Make sure your pool or spa is clean and inviting. Replace chipped tile or cement in and around your pool and consider replacing slippery cement surrounding your pool or spa with a textured surface that helps prevent slip and fall injuries.
   
   
6. Give your home a face lift
   
   Whether you’re selling or staying in your home, touching up paint, updating your home’s entry and adding flowers and plants welcomes visitors while increasing your enjoyment of your front porch and landscaping.
   
   
7. Update outdoor lighting
   
   Solar and traditional lighting options can add atmosphere and safety around your home’s exterior. Whether you’re consulting with a landscape architect or adding new lighting as a DIY project, you can buy and install your lighting now and pay off the costs in installments.
   
   
8. Invest in energy-efficient appliances
   
   If you’re still using the washer and dryer your mom gave you when you moved out, it’s time to update. Energy efficient appliances can help you reduce utility costs and reduce wear and tear on your clothes. Check with your local utility to learn about rebates and other incentive programs that can help reduce the cost of your appliances.
   
   
9. Pay for all or part of your wedding
   
   Tying the knot can be costly and stressful. Before going all out on financing your dream wedding, consider the after-effects of a long term financial hangover. The Institute for Divorce Financial Analysts says that money problems are the third most common reason for divorce in North America. Using a personal loan to cover some or all of your wedding costs may be an option. How much you can borrow depends on your credit history and individual lender policies.
   
   
10. Pay for your honeymoon
    
    You can pay for all or part of your honeymoon with a personal loan, but advance budgeting is important. All of those umbrella drinks and seaside selfies won’t be so entertaining if you return home to huge loan payments.
    
    
11. Repay loans from family or friends
    
    Few things cause as much trouble in relationships as lending and borrowing money. If your parents loaned you money for your first home or your brother helped you fund a cross-country relocation, repaying your loan sooner rather than later can ease stress and also demonstrate your loan worthiness in case of future need. Personal loans made by financial institutions are strictly a business transaction, but emotions and resentments can come between family members where money is involved.
    
    
12. Charitable contributions
    
    You want to donate to a charitable cause important to you, but are short on funds. A personal loan allows you to make a meaningful donation that you can pay off in installments.
    
    
13. Give your vehicle a makeover
    
    Repairing and cleaning your car is a cost-effective alternative to buying a car. Use a personal loan to finance mechanical repairs and maintenance and then consider repainting and detailing your car. Add a “new car scent” air freshener and you’re good to go.
    
    
14. Pay off tax debt
    
    If you owe the IRS or state taxes, consider borrowing a personal loan to pay up. Payment plans with the IRS are convenient, but they incur interest and penalties. Borrow a personal loan, settle up with the tax man and repay your personal loan without pressure or excessive cost.
    
    
15. Celebrate a milestone
    
    You’ve graduated college at 60. You’ve been married for 40 years. Your wife was promoted to CEO of her company. Celebrate a milestone with a party, special purchase or vacation.

There are plenty of uses for a personal loan, but planning and careful decisions help ensure that you get the best advantages of your loan.

Compare Personal Loans to Other Borrowing Options

Personal loans are unsecured, which means you don’t have to put up your home or vehicle as collateral.

Personal loans generally cost less than using credit cards or taking cash advance loans. The Consumer Financial Protection Bureau advises consumers that short-term borrowing options such as payday loans typically include application or transfer fees and high interest rates. Credit card cash advances or balance transfers also require payment of a fee for each cash advance or balance transfer in addition to interest charged.

Personal loans can be used for many purposes. Pay off unexpected expenses, repair your home or vehicle or make a special purchase for less than using a credit card or payday loan would cost.

Use a personal loan for debt consolidation. You can roll multiple bills into one loan with one payment, and may also save on finance charges. Keep in mind that debt consolidation only transfers debt from several accounts to one; your bills won’t be paid until your personal loan is paid in full. Debt consolidation can be a risky prospect if you’re inclined to continue running up balances on credit cards.

Unplanned and Health Care Expenses: Good Reasons to Get a Personal Loan

Things go wrong and medical needs arise. Health insurance policies have deductible and co-pay requirements; a personal loan can help manage unplanned expenses and routine care.

Keep unpaid medical bills from going to collections. While your creditors may work with patients to pay off balances owed, they may report unpaid accounts to credit reporting agencies. Borrowing a personal loan can help you avoid the consequences of late or missed payments.

Use a personal loan to pay for unplanned expenses. Your wife needs to fly across the country to visit an ill relative. You were planning to replace your 12-year old car next year, but the old car just logged its last mile. A personal loan can help pay for necessary and unplanned expenses.

Health maintenance for you and your pets. Preventive care is important for good health, but if you don’t have dental insurance, it will take a bite out of your budget. Use a personal loan to pay deductibles or uncovered health care expenses. You can also use a personal loan to pay for veterinary care.

Things to Know

Take time to shop and compare personal loans for your best loan terms and lowest cost. If you’re taking out a personal loan for a planned expense, it’s a good idea to borrow more than you’ll need in case of extra expenses. The Federal Trade Commission cautions that if you’re borrowing to consolidate credit card debt, it’s essential to understand your spending habits. Otherwise, you could end up with more debt if you continue to use your credit cards and carry balances. A personal loan is helpful for managing your finances, but it can also be misused. What would happen if you use a personal loan for a tropical vacation and then lose your job? Consider potential consequences before taking on a personal loan. In general, it’s best to limit borrowing to necessary expenses rather than discretionary spending.

But a personal loan can be used for just about anything. Some lenders want to know what you will do with the money they lend you, but as long as you’ve borrowed it for a responsible and legal reason, you can do what you want with it.

But what does that mean for you? With a mortgage, your home is the collateral. Similarly, with an auto loan, the car you buy is the collateral. Because a personal loan often has no collateral – it is “unsecured” – the interest rate will probably be higher. There are also secured personal loans if you want to lower your costs.

Here are five circumstances in which a personal loan might be a good idea.

1. Consolidate Credit Cards

If you have one or more credit cards that are charged to the max, you could get a personal loan to consolidate all the charges into one monthly payment. What makes this scenario even more appealing: The interest rate on the loan could be considerably lower than the annual percentage rates (APRs) on your credit cards. (See Debt Consolidation Made Easy for more details.)

2. Refinance Student Loans

Refinancing student loans can provide some financial relief. Your student loan interest rate may be 6.8% or higher, depending on the type of loan you have. But you might be able to get a personal loan with a lower interest rate that allows you to pay off your loan(s) faster.

Here are the issues: Student loans come with tax advantages. Also, if lawmakers were to offer any loan forgiveness programs in the future, in addition to those in place now, your refinanced student loans would not be eligible.

If you use a personal loan to pay off all or a portion of a student loan, you will lose the ability to deduct your interest payments (when you file your income taxes) along with the benefits that come with some loans, such as forbearance and deferment. And if your balance is sizable, a personal loan probably won’t cover it anyway. For additional information, check out Student Loan Debt: Is Consolidation the Answer?

3. Finance a Purchase

Financing a purchase depends on if it is a want or a need. If you’re going to take out a loan anyway, getting a personal loan and paying the seller in cash might be a better deal than financing through the seller. Don’t ever make a decision about financing on the spot, though. Ask the seller for an offer and compare it to what you could get through a personal loan. Then you can decide which is the right choice. For one example, see Personal Loans vs. Car Loans: How They Differ.

4. Pay for a Wedding

Any large event – such as a wedding – qualifies, if you would end up putting all associated charges on your credit card without being able to pay them off within a month. A personal loan for a large expense like this might save you a considerable amount on interest charges, provided it has a lower rate than your credit card.

5. Improve Your Credit

A personal loan might help your credit score in two ways. First, if your credit report shows mostly credit card debt, a personal loan might help your “account mix.” Having different types of loans is often favorable to your score.

Second, it may lower your credit utilization ratio – the amount of total credit you’re using compared to your credit limit. The lower the amount of your total credit you use, the better your score. Having a personal loan increases the total amount you have available to use. For other advice on boosting your credit score, see 3 Easy Ways to Improve Your Credit Score.

The Bottom Line

Personal loans can be useful, given the right circumstances. For example, most people can’t afford to pay cash for a home, making a mortgage loan a necessity. Be sure to consult with a trustworthy financial institution and weigh your options.

As a financial planner, I often have clients come into the bank to apply for a credit card for the reward benefits, or a line of credit for the low interest rate. More often than not, however, people forget about the third financing option – the personal loan. Let’s take a look at three reasons why a personal loan may be a better option over a credit card, and two examples of when a personal loan just won’t do.

Advantages of a personal loan

1. Fixed interest rates create stability.
A personal loan gives you a lump sum of money up front, allowing you to pay it back over a fixed term – typically a period of one to five years. Loan rates are negotiable, which is a major advantage of choosing a personal loan over a credit card. Another advantage of a personal loan is that when the loan agreement is signed, the interest rate is fixed for the entire repayment period. This means that your interest rate cannot fluctuate and your payments will always remain fixed.

2. Fixed payments are easy to budget.
Having fixed payments on your personal loan make sticking to a monthly budget a breeze. If you live on a fixed income, a personal loan may be a better option for you because the payments remain the same each and every month. With a personal loan, you don’t have to worry whether or not you’ll have enough money to make the minimum monthly payment like you would with a credit card, for example. Unlike credit cards, monthly payments on a personal loan don’t change.

3. The interest rate is lower than a credit card.
Who wants to pay 19% on a credit card? Not me. A personal loan is a great financing option if you need a lump sum of money right away and you can afford to make payments to repay the loan over time. The interest rates on personal loans are substantially lower than the interest rates on credit cards. Interest rates on personal loans are also negotiable with your bank, whereas interest rates on credit cards are not. Bottom line? If it’s going to take you a few years to pay off the debt, go with a personal loan and you’ll save in interest.

When a personal loan just won't do

If you want to enjoy travel benefits and earn rewards. Although personal loans are usually a cost efficient solution to your financial needs, they are not always the best option. If you are taking a vacation then using your credit card may be a better than applying for a personal loan because you can take advantage of the travel benefits. Upgrades, discounts and insurance coverage are all advantages that credit cards offer and personal loans do not.

Having said this, it's important that you pay the balance – or as much of the balance as possible – when the bill comes due. Falling into credit card debt solely to pay for a vacation isn’t a good idea. However, if you spend what you can comfortably afford to pay off at the end of the month – credit cards are an excellent tool for earning extra rewards and travel perks on day to day purchases you’d typically make with cash. The key here is paying off the balance in full at the end of the month – you’ll avoid paying interest and earn rewards for purchases you would have made anyway.

When you need additional warranties and protection. If you are purchasing big ticket items such as appliances, furniture or electronics, then using your credit card may be a better option. Many credit cards offer an extended warranty in addition to the coverage that already comes with the product from the manufacturer. Very often department stores offer clients the option to purchase an additional warranty but it may not be necessary if you use your credit card to make the purchase.