Are Personal Loans Good or Bad Debt?

Managing personal finances can be difficult with the increasing prices of commodities to worry about and your constant source of income. Creating a balance among your daily expenses, utilities and other aspects of your life can be quite challenging. For most people, a financial difficulty can be easily resolved by resorting to short-term personal loans.

According to studies, 1 out of 10 Australians would resort to a personal loan to be able to fund an emergency, top of payments for utilities, fund a vacation or buy a gadget. Instead of funding these emergencies, bills and wants with cash, most Aussies would go for a short-term loan, instead of cashing out their savings.

Surprisingly, the average Aussie has around 3,000 in savings, making it harder to funds other big expenses like medication, parties or other unexpected life events.
Several short-termed loans on your credit file can be quite bad on your personal finances. Being in a bad credit situation can bring you to worse if you continue to practice borrowing money to fund commodities. Personal loans can build up and become harder to repay as interest accumulates. The bottom line is – personal loans are not always the wisest solution for your urgent financial needs.

Bad Debt or Good Debt?

Personal loans can be both good and bad for your finances, depending on your circumstances and how you use your loans. A good debt can allow you to grow your loan into something you can add to your income source. Bad debts are debts that are consumed and were not converted into income.

Personal Loans as Bad Debt

Personal loans can be considered as bad debt when they are used to pay another debt. Some people would instantly resort to a short-term loan to pay for phone bills, electrical bills and other utility bills. Setting aside an amount to pay for these from your salary instead of getting a loan to pay such items. There is also a repayment option offered by utility companies. Check if their interest rates and payment terms are more favorable than that of a personal loan.

Personal loans can be considered as bad debt when they are used to satisfy a need for a commodity. Such examples would be for paying an overdue bill, purchasing a boat, or going on a vacation. Anything that you can’t afford to pay for now will be harder to afford in the future if you have accumulated interest rates and principles to worry about in the future.

If you are planning to buy a home, it would be difficult to secure a desirable interest rate and loan terms with a low credit score. Your credit score will eventually suffer if you continue to pile up personal loans without increasing your income source.

Personal Loans as Good Debt

Good debt is used to generate more income. A personal loan used as additional funds to sponsor an event that can expand your network or meet new prospective clients is considered as good debt. Another good use of a personal loan is using it to renovate a home.

Renovation increases the value of a home. If you’ll spend a personal loan to improve a property that is intended to be sold afterward, you increase the value of that property and pays for the personal loan that you took, plus the interest and the rate of return from it.

It would be advisable to take out a loan from a friend or a microfinance with a minimal or no interest. Or as the saying goes, do not buy something you cannot afford. The consequences can be a few calls from your lender or worst, a credit file so bad you won’t even qualify for bad credit home loans.