4 Times It Makes No Sense to Use a Personal Loan

Personal loans can be a good option for borrowing money. With the Federal Reserve reporting the average interest rate on a 24-month loan at 11.48% as of February 2023, it's easy to see how a personal loan could be a more affordable option than many other kinds of borrowing -- including credit card debt.

However, while there are times when taking out a personal loan is the right choice, there are also situations where this method of borrowing just doesn't make sense. Here's what they are.

1. When you're buying a car

Personal loans usually shouldn't be used to buy a car because you can get a better interest rate on a car loan. In fact, as of 2022, the average interest rate on a new car loan was as low as 4.07%, while the average rate on a loan for a used vehicle was 8.62%.

Car loan rates tend to be lower than the rates on personal loans because vehicle loans are secured loans while most personal loans are not. The car acts as collateral so the lender takes less risk with an auto loan because it can repossess the vehicle to make itself whole if you fail to pay back the loan. But, as long as you don't default on your car loan, this isn't a concern. You're better off with a cheaper car loan rather than a personal loan.

2. When you need to borrow a small amount for a short time

Personal loans can take some time to apply for, and many of them have payoff periods of a year or longer. If you want to borrow money for a short time, you may be better off with a 0% APR credit card.

Many cards offer no interest on purchases within the first month of becoming a cardholder. If you opt for one of them instead of a personal loan, you can avoid paying any interest as long as you pay off the loan before the promotional rate expires. It can also be faster and easier to apply for a credit card than a personal loan.

3. When you're borrowing to invest

Using a personal loan to invest money is a bad idea. Investments all carry some level of risk. If you borrow and then lose money, you'd still have to pay back the personal loan. This could put a strain on your finances, especially as you'd be paying interest on money that you lost in your bad investment.

4. When you're borrowing for something you really can't afford

Finally, you shouldn't borrow to fund a lifestyle you can't afford, as this will only make living within your means harder in the future since you'll now have another monthly payment that comes out of your bank account.

It's far better to save up for big purchases and pay cash for them. Even if you can't do that, you need to be careful about how much you're spending on borrowed money. If the monthly payments on a personal loan would be at the top of your budget, this is a situation when you should definitely avoid borrowing.

In all of these situations, getting a personal loan could be a choice you regret. So, avoid getting a personal loan under these four circumstances.