When Does a Personal Loan Make Sense and When Doesn’t It?

The contents provided on this page are for informational purposes only and do not constitute financial advice. Consider your personal circumstances and objectives before making any financial decisions.

Can you get a personal loan? The answer to that is, usually, yes.

Should you get a personal loan? The answer to that is a little more nuanced.

A personal loan can be a useful financial tool in your toolkit, but only in the right situations. You wouldn’t use a hammer to saw through a wooden slab, you shouldn’t use a personal loan for just anything.

A personal loan may be worth considering If you need to cover a larger expense, spread repayments over time, or simplify existing debt. But it may not be a fit for smaller amounts you can cover in just a few pays.

When comparing your options, a good place to start is at the basics: what the money is for, how much you need, how urgently you need it, and the availability of other finance options that you can explore in the meantime.

But if you are set on a personal loan, let’s explore when it makes sense as an option and when it may not be the best fit.

When does a personal loan make sense?

There’s actually no hardline, set-in-stone, one-size-fits-all answer to this question. Like many things, whether a personal loan is suitable depends on your situation, your finances, and importantly, your ability to manage repayments over time.

As a general rule of thumb however, a personal loan is typically used for future-focused finances, the larger items that you plan to pay. For your smaller money needs there are usually many other different options available, such as Beforepay Pay Advance.

Pay Advance is designed for sudden, short-term expenses that occur between pays or costs that are more than expected. Borrow up to $2000 in as little as 5 minutes, with clear fees, no credit checks, and repayments aligned to your pay cycle.

Does a personal loan make sense for larger expenses?

Often, yes.

Personal loans are generally better suited to larger costs that would be difficult to cover using your normal cash flow. These might include:

• A major car repair.
• Home repairs or maintenance.
• Moving costs.
• A planned expense you need time to repay.
• Debt consolidation. 

Due to the loan amount typically being higher and repayments being spread out over a longer timeframe, personal loans can work better for those kinds of costs than smaller short-term borrowing options.

Does a personal loan make sense if you want fixed repayments?

This depends on whether the personal loan has a fixed or variable interest rate. Fixed rates remain the same over a certain period of the loan, or the entire loan, providing a bit more certainty in regards to repayments. Alternatively, variable interest rates can change over the duration of your loan, potentially decreasing or increasing the amount you pay.

If you like knowing how much you’ll need to pay and when, the predictability of fixed rates can make budgeting and financial management easier. This can be especially helpful if you already have other expenses like rent, groceries, transport, and bills taking up most of your pay.

Is a personal loan a good option for debt consolidation?

It can be, depending on the situation.

Using a personal loan to combine multiple debts into one regular repayment is a common strategy, with debt consolidation loans being offered by many lenders. This can make things easier to manage and may help if you’re trying to simplify your finances. But this really depends on how the new loan repayments and terms stack up overall.

That means looking beyond the weekly or monthly repayment and checking:

• The interest rate.
• Upfront or ongoing fees.
• The full cost over the life of the loan.
• Whether you’ll actually be better off overall.

If the debt consolidation loan adds extra cost without making the situation easier to manage, it may not be a worthwhile option.

We even wrote an article exploring the very question of whether or not taking a loan out to pay a loan is a good idea.

Does a personal loan make sense for planned expenses?

Personal loans tend to work best for expenses that are considered, essential, and planned, but there are many uses for personal loans that don’t fit into this mold.

It’s wise to interrogate the reason behind the idea to really drill down into whether you need a personal loan or whether you can simply save for the expense over a longer period of time.

Even your essentials, such as home repairs, renovations, car purchases, and more, may be pushed further down the road, rather than applying for a loan. The clearer the purpose, the easier it is to work out whether the loan is solving a real problem or just making it a little easier in the moment.

When doesn’t a personal loan make sense?

Now the flip side; a personal loan may not be the best option when the expense is small, avoidable, or likely to put too much pressure on your finances.

Does a personal loan make sense for small short-term gaps?

Not always.

If you only need a relatively small amount to get through to your next pay, a personal loan may be more borrowing than you actually need. You don’t want to overcorrect for a short-term gap, and inadvertently put yourself in a more stressful financial situation.

That doesn’t mean a personal loan is wrong in every small-expense scenario. But if the need is temporary and modest, it’s worth asking whether a long-term repayment commitment makes sense.

Should you get a personal loan for impulse spending?

It might not be the best decision.

Something unplanned and non-essential, but exciting-in-the-moment, is often not what you should  take out a loan for. Especially if you need to justify it later. The repayments tend to stick around well after the buzz of the purchase may have worn off.

That doesn’t mean every discretionary expense is automatically a bad idea. But if you’re borrowing for something you didn’t plan for and don’t truly need, it can help to pause and ask whether the loan is supporting your overall goals, or getting in the way of them.

Does a personal loan make sense if repayments would be tight?

If repayments would make your budget uncomfortably tight, it might be a sign of a personal loan not being truly beneficial.

Even if you meet the lender’s eligibility criteria, the bigger question is whether the repayments would leave you with enough room for the rest of life. If paying back the loan would make it harder to cover essentials or force you to rely on more borrowing later, it may be an active detriment to your financial stability.

But the reasons for a personal loan are, as the name suggests, personal, and you may want to consider speaking to a licensed financial advisor if you have any additional questions or doubts. 

What should you ask before getting a personal loan?

Before applying, you might consider asking yourself:

• How much do I actually need to borrow?
• What is the money for?
• Is this expense urgent, necessary, or optional?
• Can the expense be pushed until later?
• Can I comfortably afford the repayments?
• What is the total cost once fees and interest are included?
• Do I need a longer repayment term, or would a shorter-term option suit better?
• Is there another way to cover the cost?

This can help you frame the pros, cons, and costs (in every sense of the word), of getting a personal loan rather than just diving straight in.

What are the alternatives to a personal loan?

Depending on the situation, you might also consider:

• Using savings, if available and if it won’t leave you too exposed.
• Adjusting your budget temporarily.
• Arranging a payment plan with a bill provider.
• Delaying a non-essential purchase.
• Using a smaller short-term borrowing option for a genuine short-term gap.

The right choice depends on the size of the cost, how soon you need the money, and how repayment would affect the rest of your finances.

So, when does a personal loan make sense?

A personal loan can make sense when you need a larger amount, have a clear reason for borrowing, and can comfortably manage the repayments over time.

It may not make sense when the expense is small, the cost is avoidable, or the repayments would add pressure to your budget.

That’s why it helps to slow down before applying. Look at the full cost, the repayment timeline, any fees, and how much you’ll end up paying. It’s about having as much information as possible.

Used thoughtfully, a personal loan can be a practical option. Used without a clear plan, it can be an expensive one.

Debating on whether a personal loan is right for you?

Check out our comparison between Pay Advance and Personal Loan.

Not sure where to start with personal loans?

Check out some personal loan tips for first time borrowers.

FAQs

When is a personal loan a good idea?

A personal loan may be a good idea when you need a larger amount for a clear purpose and can comfortably repay it over time.

When should you avoid a personal loan?

You may want to avoid a personal loan if you only need a small amount, the purchase is optional, or the repayments would make your budget too tight.

Is a personal loan good for debt consolidation?

It can be, if it simplifies your repayments and compares well on total cost. It’s worth checking fees, rates, and the overall amount repayable before deciding.

Is a personal loan better than a short-term loan?

That depends on the amount you need, how quickly you need it, and how long you need to repay it. Personal loans are generally better suited to larger, longer-term borrowing needs.

What matters most before taking out a personal loan?

The big things are how much you need, what the money is for, how urgent it is, and whether the repayments fit comfortably within your budget.

Disclaimer: Beforepay Group Ltd, ABN: 63 633 925 505. Beforepay allows eligible customers to access their pay and provides budgeting tools. Beforepay does not provide financial products, financial advice or credit products. The views provided in this article include factual information and the personal opinions of relevant Beforepay staff and do not constitute financial advice. Beforepay and its related bodies corporate make no representation or warranty, express or implied, as to the accuracy, completeness, timeliness or reliability of the contents of this blog post and do not accept any liability for any loss whatsoever arising from the use of this information. Please read our Terms of Service carefully before deciding whether to use any of our services.