Sometimes it pays to borrow, even when you have cash on hand.
- Personal loans allow you to borrow money for any purpose.
- In some cases, it makes sense to pay interest on a loan even though you have money in the bank.
There may come a time when you need access to a pile of cash, whether it’s to meet an unexpected expense or to take on a big project like home renovations. If you have money in savings, you might assume your best bet is to plunder that account rather than borrow. But in some cases, borrowing at an affordable price may be a better alternative to withdrawing too much money from your personal reserves.
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When a personal loan pays
A personal loan lets you borrow money for any reason (as opposed to mortgages and car loans, which let you borrow for the express purpose of financing a home or vehicle, respectively). As such, personal loans are quite flexible. They also tend to offer relatively competitive interest rates, which means you’ll generally pay much less interest on a personal loan than what a credit card will charge you.
If you need money and have some savings, you might be tempted to dip into your bank account and withdraw a large sum of money. But if that leaves you short in a future emergency, then it might be worth taking out a personal loan instead.
Imagine spending $3,000 a month on essential living expenses and having $10,000 in emergency savings. If you need $2,000 to buy furniture and you take that money out of your savings, you reduce your balance to $8,000.
At this point, you will be below the recommended minimum threshold for emergency savings. As a general rule, it is advisable to have enough money in savings to cover at least three months of essential bills. In this situation, a personal loan might make sense, especially since the expense in question is not an emergency.
You can also decide to take out a personal loan in order to have peace of mind by leaving your savings alone. Let’s say you have $20,000 in savings, which is enough to cover about six months of essential living expenses. If you want or need $3,000 to undertake a home renovation or repair and feel better not to dip into your savings, taking out a personal loan makes perfect sense, especially if you’re qualify for a competitive interest rate on the amount you’re looking to borrow.
It’s all about financial flexibility
Not only are personal loans a flexible financial product (in that you can use your loan proceeds for any purpose), but they can also give you more financial flexibility. You may want to maintain a higher savings balance not only to protect yourself against unexpected bills, but also to allow you to pursue different goals, such as starting a business or buying a second home. If a personal loan allows you to keep your cash reserves intact, there’s nothing wrong with taking out one as long as the interest isn’t excessive – which, if your credit score is in good shape, doesn’t probably won’t.
Now, if you’re thinking of paying a higher interest rate on a personal loan, then it might be worth relying on your savings. But if you shop around for a personal loan, you might be able to get an interest rate that makes the loan worthwhile.
The Ascent’s Best Personal Loans for 2021
The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.