3 Reasons It Really Pays to Avoid a Personal Loan for the Rest of the Year

When you want to borrow money, there are different options you can consider. If you're not yet at the top of your credit limit, you could always rack up or add to a credit card balance. But you may prefer to sign a personal loan for a few reasons.

First, the interest rate on a personal loan might be considerably lower than what a credit card will charge. Also, credit card interest tends to be variable, whereas with a personal loan, you'll get the benefit of fixed, predictable monthly payments.

Also, if you make your personal loan payments on time, it shouldn't negatively affect your credit score. It may even have a positive impact. When you take on credit card debt, you risk damaging your credit score by virtue of having too much of it -- even if you're making every single minimum monthly payment on time.

But while it's easy to see why a personal loan might appeal to you in general, you may not want to sign one for the rest of 2023. Here's why.

1. You may be tempted to overspend on the holidays

Personal loans let you borrow money for any purpose. You may be looking to take out a $5,000 loan to fix up your home or repair your car. But if you're able to qualify for a $7,000 loan, you may be tempted to take it on so you can go all out on the holidays. 

That's not necessarily a great thing, though. It's OK to spend freely on the holidays when you can afford to. If you're already borrowing for other purposes, you really don't want to take on more debt just to buy more gifts and throw more parties. 

You might end up struggling to pay off your debt after the fact. And while it's one thing to land in that boat because you needed to make your car drivable, it's another thing to land there because you didn't want to skimp at all on holiday spending.

2. You don't want to start the new year with debt

Many people try to maintain a positive financial outlook at the start of the new year. But a nagging loan balance might make that difficult.

It can be a tough thing mentally to know you owe money and have monthly payments to contend with. If you're able to avoid borrowing with a personal loan in the coming weeks, you can at least kick off 2024 with a cleaner financial slate.

3. Borrowing rates aren't favorable right now

Personal loans are often hailed as an affordable way to borrow money. But right now, borrowing is expensive in general thanks to the multiple interest rate hikes the Federal Reserve has implemented over the past year and a half.

The Fed has been eager to cool inflation, so it has raised interest rates in an effort to get consumers to slow their spending. It's more expensive to sign just about any type of loan right now, whether it's a personal loan, an auto loan, or a home equity loan. 

Come 2024, the Fed may be in a position to cut rates, which could result in lower borrowing costs. So if you're able to delay your personal loan, you might benefit in the form of a lower interest rate.

Before you make plans to sign a personal loan this month or next, consider the upside of waiting at least a bit. You may find it's the better financial decision.