Over 28 Million People Took Out a Personal Loan in Late 2023. Should You?

Having cash in a savings account can put you in a position of not having to borrow money when unplanned expenses pop up, or when you have a planned expense you no longer want to put off. But if you don't have enough cash in the bank to cover unexpected bills or larger expenses like home renovations, then you may seek to borrow money. And you may decide to apply for a personal loan for the multiple benefits involved.

The nice thing about personal loans is that they allow you to borrow money for any purpose, whether it's repairing your car, finishing your basement, or buying equipment to start a side hustle. Plus, with a personal loan, you get the benefit of a fixed interest rate and predictable, steady monthly payments. 

During the fourth quarter of 2023, 28.1 million new personal loans were issued, reports TransUnion. And you may be eager to sign one in the near term. But here's why you may want to reconsider that.

You risk unfavorable consequences for falling behind

Personal loans, unlike auto loans and mortgages, are unsecured, which means they aren't tied to a specific asset. As such, you don't risk losing your home or having your vehicle repossessed when you fail to repay a personal loan on time. But that doesn't mean you don't risk unfavorable consequences.

If you don't repay a personal loan, at the very least, your lender will report you as delinquent to the credit bureaus. From there, your credit score could take a massive hit. Once that happens, you may be denied the option to borrow again in the near term. And if a lender does approve you for a loan or line of credit, you might get stuck with a very expensive borrowing rate.

Also, if you blow off your personal loan completely, your lender could attempt to sue you in court. If a judgment is entered against you, you risk consequences like wage garnishment to help your lender get repaid.

It's a bad time to borrow in general

The Federal Reserve spent a good part of 2022 and 2023 raising interest rates to help cool inflation. As a result, it's expensive to put pretty much any type of loan in place, including a personal loan. This holds true even if you have excellent credit.

The good news is that the Fed is expected to start cutting interest rates at some point this year. And those rate cuts are likely to continue into 2025. So in time, the cost of signing a personal loan has the potential to come down. 

But we're not there yet. So if you're able to wait on borrowing money, it's a good idea to sit tight. Waiting a year to take out a personal loan could leave you paying a lot less each month, which reduces your risk of falling behind. 

Of course, if you need a personal loan to repair your roof, you may not be able to wait. But if you want one to renovate your kitchen, that's something you can put off as long as your current kitchen is functional.

All told, personal loans can be a convenient means of borrowing. But any time you commit to a loan, you take on a bit of risk -- not to mention an extra monthly expense. So think carefully before signing up for a personal loan today, especially given current borrowing rates.