Here Are the Right Ways (And the Wrong Ways) to Use a Personal Loan

Author: Holly Johnson / Source: Wise Bread

Credit cards make it easy to borrow money in a pinch, but they aren’t ideal when you need time to pay the money back. The average credit card interest rate is currently over 17% APR, after all. That’s a ton of money in interest to fork over for no real benefit, and the cost can be even more crushing if you need months or years to repay.

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For that reason — and really, for plenty of others — many consumers turn to personal loans for their borrowing needs. Unlike credit cards with variable interest rates, personal loans come with a fixed interest rate that can be as low as 4.99% APR. Personal loans also come with a fixed repayment timeline and a fixed monthly payment that will never catch you by surprise. If you need to borrow a large sum of money and pay it back over 24, 48, 60 months, or longer, a personal loan can make the experience a lot less expensive and much more predictable. (See also: 5 Times Personal Loans May Be Better Than Credit Cards)

How you should (and shouldn’t) use a personal loan

Personal loans come with many of the same pitfalls as credit cards, including how you can easily bite off more than you can chew. You can overspend and send your finances into a tailspin with credit cards or a personal loan if you don’t know your limits.

Really, there are savvy ways to use a personal loan and disastrous ways that can leave you worse off in the end. Here are some ways to use a personal loan, and some to avoid at all costs. (See also: This Is the Difference Between a Loan and a Line of Credit)

Smart ways to use a personal loan

If you’re going to apply for a personal loan, make sure you use it the correct way.

Consolidating high-interest debt

If you have high-interest debt that’s making it difficult to get ahead, consolidating with a personal loan can make a lot of sense. Imagine your credit cards have the average APR of 17% or higher and you’re able to consolidate with a personal loan that boasts an APR of 5% or 6%. Not only will you save big money on interest payments, but you can simplify your life by going from multiple payments each month down to just one. (See also: Which Balance Transfer Credit Card Is The Best For You?)