Should You Take Out a Personal Loan When You Have Savings You Can Tap?

The quick answer? It depends.

The great thing about personal loans is that they tend to be more flexible and affordable than other borrowing options. Granted, these days, personal loan rates are up due to interest rate hikes on the part of the Federal Reserve. But when you compare the cost of borrowing via a personal loan to a credit card, it's easy to see why the former might win out.

Now a personal loan may be a good option to fall back on when an unplanned bill arises and you need money out of the blue. But what if you have money in your savings account -- enough to cover the expense you're facing? Should you dip into your emergency fund? Or should you leave your cash reserves alone so that money is there for another time and take out a personal loan instead?

It's all a matter of what you're borrowing for and how much cash you have

Some people take out personal loans for non-emergency situations, such as to renovate their homes. If that's the scenario you're in, then you don't want to raid your emergency savings to pay for something like new kitchen appliances or an updated master bathroom. But if you're thinking of getting a personal loan because an unplanned bill has popped up, you may want to consider tapping your emergency fund if it's well-stocked.

While personal loans do tend to come with more competitive borrowing rates than other loan products, at the end of the day, you're still going to pay interest on the sum you borrow. And also, as mentioned, personal loan rates are up right now because all consumer borrowing rates are higher. As such, you may end up finding that a personal loan isn't as affordable as you might think.

So, let's say you've run into an issue with your car that you need to address immediately, and you're looking at a $5,000 bill. You may be inclined to borrow that money and leave your savings untouched. But even if your credit score is great, you might easily, at today's rates, pay 6% or 7% (or more) if you take out a personal loan to cover that cost. And so if you have, say, $20,000 in savings, you may want to dip into that instead, since you'll still be left with a decent chunk of cash after taking that withdrawal.

On the other hand, if you only have $5,000 in savings, you may not want to empty out your bank account to cover your car repair, thereby leaving yourself vulnerable in the event of another unplanned expense. So in that scenario, taking out a personal loan would be a reasonable thing to do.

Weigh your options carefully

Sometimes, it pays to get a personal loan even when you have money in the bank. If you do decide to get a personal loan, try to shop around with a few different lenders so you can compare their rates and closing costs. Doing a little research could make your personal loan more affordable at a time when rates are up across the board.