Unsecured personal loans can pay for almost anything. Their flexibility makes them easy to use when you want to consolidate debt or install that kitchen island.

But evaluating all of your financing options first can save you money. As the economy evolves, the way a personal loan will fit into your plans as well.

Right now, for example, the cheapest way to get extra cash might not be with a personal loan, but 401 (k) funds. The government is allowing penalty-free withdrawals of these savings for those affected by COVID-19.

Still, taking money out of your 401 (k) could cause you to lose potential market gains and put your retirement plan back on track.

Even if a unsecured loan is not the cheapest, it might be the next best option. Here’s what financial planners are saying about some of the reasons people take out personal loans.

DEBT CONSOLIDATION

A debt consolidation loan allows you to consolidate existing debt from different sources, such as credit cards and other loans, into one loan. It can save you money if you get a lower annual percentage rate on the new loan.

It’s also an option if you don’t want to pay off your debts from smallest to largest, also known as the snowball approach to debt, says Angela Moore, Miami-based certified financial planner of Modern Money Advisor. This repayment method focuses on small wins, but it won’t save you time or interest.

She says what makes personal loans work well for consolidation is the end date they put on your debt. Credit cards, such as balance transfer cards that can also be used to consolidate debt, typically have revolving balances and open lines of credit that you can continue to spend against.

But if you’re used to using credit cards, try putting them aside before committing to loan repayment terms, says Tony Matheson, a certified financial planner based in Sacramento.

“I want to make sure that (people) don’t just go into a deeper hole and compound the problem with more debt,” he says.

HOME IMPROVEMENT

If spending time at home makes you want to renovate, personal loans are one way to pay it off.

They don’t require you to have equity in your home or use your home as collateral. But they often have higher interest rates and shorter repayment periods than home equity loans or home equity lines of credit.

The main argument for something like a HELOC is a low interest rate, says Moore. But she recommends walking lightly where you borrow against your house.

“If you take out a home equity line of credit,” she says, the lender could take your home if you aren’t able to repay the money. “So you’re swapping something for that lower interest rate.”

MEDICAL INVOICES

If you’re faced with a big medical bill that you can’t cover all at once, a personal loan could cover it. But another potentially cheaper option is a low-interest or no-interest payment plan through the health care provider, Matheson says.

He recommends comparing term lengths and monthly payments to decide which one is best for your financial situation.

You can also work with a Medical Bill Advocate, who can spot costly mistakes and negotiate costs to make your bill more affordable. Just be sure to ask about attorney fees.

HELP SOMEONE ELSE

Financial planners widely advise against getting a personal loan to help someone else.

While he understands the urge to help, Wisconsin-based certified financial planner Ben Smith suggests considering what borrowing on someone else’s behalf may have for your own financial plans. Will lending money derail your retirement plans or delay your dream of owning a home?

“It’s kind of like when you’re on a plane and the flight attendant tells you, ‘Put on your own oxygen mask before helping others,’” he says.

INVOICE COVERAGE

Taking out a personal loan to cover a mortgage or utility bill is a case where getting a loan can do more harm than good.

If you’re affected by COVID-19, now might be the time to consider a penalty-free withdrawal from your 401 (k) instead, Smith says.

If you can’t make ends meet after cutting your budget, Moore says, you’re probably considering a bigger lifestyle change, like moving in with your parents or selling your house.

“I think people need to think longer term, more strategically,” she says. “I recommend finding ways to just reduce your needs – reduce what you need in terms of money by eliminating as much expense as possible.”

This article was provided to The Associated Press by the NerdWallet personal finance website.


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