When is the right time to take out a personal loan?

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There’s no one ‘right’ time to take out a personal loan, because each person’s financial and life circumstances are unique.

In fact, it can often be better not to take out a personal loan if it’s not going to improve your financial and life position.

That’s because with a personal loan – or any sort of loan – you’re effectively ‘buying’ money. In other words, you’re doing the equivalent of buying $1 coins for, say, $1.10.

If you’re going to buy a $1 coin for $1.10, there ought to be a good reason.

The right time to take out a personal loan

Taking out a personal loan can sometimes make sense when you’re unexpectedly hit with a large bill.

For example, if you suddenly have to take care of medical surgery for your child or emergency repairs for your home, you’ll have to quickly access a lot of money.

Buying money in those kinds of situations can make sense, because the key consideration is speed rather than cost.

Another good time to take out a personal loan can be when you’re consolidating debt.

For example, imagine you had a credit card that was carrying $12,000 of debt at an interest rate of 20 per cent; and imagine you also had an existing personal loan of $9,000 at 13 per cent. In that situation, you could improve your financial position if you took out a $21,000 personal loan at, say, 10 per cent, and used it to pay off the debt on your credit card and original personal loan.

Now, instead of having to pay debt of $12,000 at 20 per cent and $9,000 at 13 per cent, you have to pay $21,000 at 10 per cent. So you’re still buying money, but at a reduced price.

The wrong time to take out a personal loan

Personal loans don’t make sense if the cost of buying money exceeds the benefits. This often applies when you take out a personal loan for the sake of consumption.

One example is borrowing money for a holiday. If you took out a loan of $5,000 to fund a holiday and then paid an additional $1,500 in interest and fees over the life of the loan, your $5,000 holiday would effectively become a $6,500 holiday.

That would then beg two questions. Was the holiday really worth $6,500? And was it the best way to use that extra $1,500?

If you were to answer ‘yes’ to both questions, you could argue that the personal loan was a good decision. But a ‘no’ for one or both of those questions would suggest it probably wasn’t.

Final word

Each individual is unique, so a financial decision or product that might be appropriate for one person might not be appropriate for another.

Taking out a personal loan should never be done lightly. You should seek professional advice before you take out a personal loan or any other loan product.


^Words such as "top", "best", "cheapest" or "lowest" are not a recommendation or rating of products. This page compares a range of products from selected providers and not all products or providers are included in the comparison. There is no such thing as a 'one- size-fits-all' financial product. The best loan, credit card, superannuation account or bank account for you might not be the best choice for someone else. Before selecting any financial product you should read the fine print carefully, including the product disclosure statement, fact sheet or terms and conditions document and obtain professional financial advice on whether a product is right for you and your finances.

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