Unexpected Expenses Can Put Pressure on Almost Any Budget

Even a carefully planned budget can be disrupted by an expense that arrives without warning. A transmission fails. A medical bill is larger than expected. An essential appliance stops working. A sudden trip becomes unavoidable.

When savings are not enough to cover the entire cost, borrowing may become part of the conversation.

Personal loans are one option because they generally provide a set amount of money that is repaid through scheduled monthly payments. Depending on the borrower’s credit, income, lender, and other factors, a personal loan may also carry a lower interest rate than some high-interest credit cards or short-term borrowing products.

Key Takeaways

  • Personal loans may be used for car repairs, medical bills, home repairs, emergency travel, and other larger expenses.
  • Many personal loans have fixed repayment schedules, which may make budgeting easier.
  • Rates and terms can vary significantly based on credit and lender requirements.
  • Comparing APR rather than only the advertised interest rate can provide a better picture of borrowing costs.
  • High-cost payday or short-term loans can be considerably more expensive than other borrowing options.
  • Borrowers should consider the monthly payment as well as the total amount that will be repaid.

Why Personal Loans May Work for Larger Expenses

A credit card can be convenient for smaller purchases, especially when the balance can be paid quickly. Larger expenses can be different.

Carrying a significant credit card balance for months or years can result in substantial interest charges. A personal loan typically has a defined repayment period, which means borrowers know how long payments are expected to continue.

Experian notes that a personal loan can sometimes make more sense than credit card debt when a borrower needs additional time to repay the expense and qualifies for a favorable interest rate.

That does not mean a personal loan will always be cheaper. A borrower with weaker credit may receive a higher rate, and some lenders charge origination or other fees.

The important question is not simply whether financing is available. It is what the financing will cost from beginning to end.

Compare the APR, Not Just the Monthly Payment

A smaller monthly payment can look attractive, but it may result from extending the repayment period.

Longer terms can make each payment easier to manage while increasing the total amount of interest paid over the life of the loan.

The annual percentage rate, or APR, can be particularly useful when comparing offers because it reflects interest along with certain fees associated with borrowing.

Consumers interested in understanding that comparison can review Experian’s breakdown of personal loans versus credit card debt. Personal Loans vs. Credit Card Debt — Experian

Before choosing a loan, borrowers may want to compare:

  • APR
  • Monthly payment
  • Loan term
  • Origination fees
  • Late-payment fees
  • Prepayment policies
  • Total repayment cost

A loan with a slightly higher monthly payment may sometimes cost less overall if it has a shorter term or fewer fees.

Credit Can Affect the Options Available

Credit history is one factor lenders often consider when reviewing an application.

Borrowers with stronger credit profiles generally have a better chance of receiving favorable rates. Those with less-than-perfect credit may still find personal loan options, but borrowing costs may be higher.

Income, existing debt, requested loan amount, and lender-specific underwriting requirements may also play a role.

This is one reason comparing several lenders can matter. Rates and eligibility standards are not identical from one lender to another.

For a broader look at ways people handle sudden bills, NerdWallet provides an overview of different approaches to covering an emergency expense. Ways to Cover an Emergency Expense — NerdWallet

Watch Out for Expensive Short-Term Borrowing

An unexpected expense can create pressure to solve the problem immediately.

That urgency can make short-term products such as payday or title loans appear convenient. However, these products can carry extremely high borrowing costs and short repayment periods.

A personal loan is not automatically inexpensive, but it may provide more time to repay a larger expense and a clearer payment schedule.

Bankrate offers a useful overview of both the benefits and drawbacks consumers should consider before using a personal loan. Pros and Cons of Personal Loans — Bankrate

Consider Other Options Before Borrowing

Borrowing does not have to be the first solution.

Depending on the expense, consumers may be able to:

  • Ask a medical provider about a payment plan.
  • Request additional time to pay a utility or service bill.
  • Use emergency savings for part of the cost.
  • Ask whether a repair provider offers financing.
  • Consider assistance programs when available.
  • Borrow only the portion of the expense that cannot be covered another way.

Reducing the amount borrowed can reduce both monthly payments and total interest.

The Bottom Line

Unexpected expenses are difficult partly because there is little time to prepare for them.

When cash or savings are not enough, personal loans may provide a structured way to cover a larger expense and repay it over time. They may also be preferable to relying heavily on high-interest credit cards or expensive short-term loans in some situations.

The best option depends on the borrower’s credit, income, amount needed, available rates, and ability to handle the monthly payment.

Comparing the total cost before borrowing can help turn an unexpected expense into a financial problem with a clearer path forward.

Sources

  1. NerdWallet, Millions Can’t Cover an Emergency Expense. Here’s How to Handle One.
  2. Experian, Is Personal Loan Debt Better Than Credit Card Debt?
  3. Bankrate, Pros and Cons of Personal Loans.