The One Question You Must Ask Yourself Before Signing a Personal Loan

Consider it carefully before moving forward.

There may come a point when you're inclined to borrow money to do something big, whether it's renovating your home, taking an overseas vacation, or upgrading your furniture from shabby futons and beat-up dressers to a new living room and bedroom set. And you may be considering a personal loan as your preferred method of borrowing money.

The great thing about personal loans is that they're very flexible. When you take out a mortgage, you have to use your loan proceeds to purchase a home. But you can take out a personal loan and spend its proceeds on just about anything.

Another awesome thing about personal loans? They tend to come with competitive interest rates. You'll generally pay a lot less interest on a personal loan, for example, than you will with a credit card (plus, personal loan interest is fixed, whereas with a credit card balance, it can be variable).

But taking out a personal loan is actually a big financial commitment. So before you sign that paperwork, you'll want to ask yourself one key question.

Can I really keep up with these payments?

A personal loan may be a less expensive way to borrow than others. But you're borrowing money nonetheless. And so before you sign a personal loan, you'll need to make absolutely sure that you can keep up with your monthly payments under that loan. If you don't, you could face pretty bad consequences.

Any time you're late with a loan payment, whether it's an auto loan, a home loan, or a personal loan, your credit score can take a big hit. And a pattern of late payments can cause extreme credit score damage.

Once that happens, it may become difficult, if not impossible, to borrow money until your score improves, and this could take an extended period of time. And that could spell trouble in a true financial emergency.

So, let's say you're thinking about taking out a personal loan to update your kitchen. That's a reasonable thing to want, but it's not really a need (unless your kitchen isn't functional in its current condition). If you fall behind on the personal loan you take out to finance that renovation, you might damage your credit extensively.

Meanwhile, let's say a year after your kitchen renovation is complete, you lose your job and can't cover your bills. If you've maxed out your credit cards, turning to a personal loan may not be an option at that point if your credit score is still in very bad shape. And that could mean landing in a truly dire spot.

That's why you really must crunch the numbers before taking out a personal loan. That way, you can see what monthly payment you're in for and make sure it's one you can swing.

Don't get in over your head

Just because personal loans tend to charge competitive interest rates doesn't mean they can't get expensive. Be very careful when taking out one of these loans so you don't wreck your credit and suffer the consequences for many years after the fact.