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When is a Loan a Bad Idea?

While loans have many benefits, there are situations when and where a loan is a bad idea.

Loans are useful financial tools that often make the impossible possible. For most, buying a new home or car with cash isn’t an option. Loans allow people to borrow money and repay the balance over a period of time that best fits their financial capabilities.

Loans also help finance events, such as weddings, or provide necessary monthly cash flow through credit cards for everyday essentials. However, loans can easily become financial burdens and cause significant challenges if not used responsibly. While loans have many benefits, there are situations when and where a loan is a bad idea.

Always make sure that if you’re borrowing money, you’re doing it to better your financial position. Let’s review a few instances when a loan isn’t in your best interest.

Thoughtless Spending
It’s definitely not a good idea to take out a loan (or open a new credit card) to use for frivolous needs. For example, using a credit card to go on a shopping spree or taking out a personal loan for an extravagant vacation you know you can't afford is usually asking for trouble.

Before borrowing money, you must have a plan in place to repay the balance on time. This includes understanding what your payments will be and for what duration. 

Low Credit Score
If your credit score isn't the best, your priority should be to improve your score. With focused discipline, you can improve your credit score significantly within several months. Otherwise, lenders will charge you higher interest rates because you’re a greater risk.

If you miss payments regularly or struggle to make ends meet, high-interest loans will only make it more difficult for you in the long run. Focus on improving your credit score and money management skills before you ask to borrow money.

Paying Bills
Sometimes we face unexpected expenses that temporarily derail our financial plans - that’s understandable. However, if you’re living beyond your means or regularly struggle with your finances, borrowing money is likely to widen the gap.

If you’re considering a loan to help cover your current living expenses, it may be time to speak to a financial professional. A little guidance on budgeting and creating a workable financial plan can go a long way to improving your monetary situation. 

A Temporary Fix
When people find themselves in an unfavorable financial situation, they often believe a quick loan will help them get back on financial track. Before borrowing money, you need to review your financial situation thoroughly. Will the loan help you correct the course, or is it merely a temporary fix?
If there are more significant financial challenges at hand, such as a loss in income, a loan may only make the situation worse. Working with a financial counselor may be the best step in helping you regain control of the problem.

Unbeatable Deals
Stores are great at luring in shoppers with extravagant sales and deals. To top it off, they offer you free merchandise in exchange for enrolling in their credit card. These promotions often coerce consumers into buying more than they can afford – and the high interest rates and fees cause further challenges down the road.
Whether it’s a store credit card or another offer you feel you can’t refuse, it may be best to take a step back and consider the repercussions. If you cannot pay cash, is it really worth it to go into debt?

We’re Here to Help!
Loans and credit cards are financial tools that you must use responsibly. That doesn’t mean if you’re struggling financially, a loan will not help you. In fact, many times, a consolidation loan is the perfect solution to help you get back on financial track and limit the amount of interest you pay.

However, it’s best to seek the guidance of professionals to find the solutions that best fit your unique financial situation. As your credit union, we’re here to answer all your questions and help you create a better tomorrow, financially speaking.

Visit lmfcu.org, stop by the Credit Union, or call 410-687-5240 to speak with a Loan Specialist today.

Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.