According to statistics, 56% of Americans don’t have enough savings to cover a $1,000 emergency expense.
If you’ve been hit by a financial emergency, applying for a personal loan is usually a cheaper choice than maxing out your credit card. Taking out a personal loan can also be a cost-effective way to invest money into your home or consolidate debt.
Depending on how much you need, when applying for a personal loan you’ll be faced with a choice. Do you apply for as little as possible, or should you apply for the maximum personal loan amount you can receive?
The answer will depend very much on your personal needs. However, there are a few rules of thumb you can use to make a wise decision.
Keep reading to find out the pros and cons associated with taking out the maximum personal loan amount.
Personal loans usually range in size between $1,000 and $50,000, depending on the lender.
Here are some of the advantages of opting for the highest loan amount you qualify for.
One of the most obvious benefits of taking out the maximum personal loan amount is that you’ll receive more cash to work with.
This isn’t beneficial in all situations, but it can be a good move if you put the money to wise use.
For instance, maybe you’ve been offered the opportunity to buy a profitable business with positive cash flow. In this case, leveraging a personal loan could be the financial stepping stone you need.
Taking the maximum loan amount available can also be beneficial if you’ve been faced with a big unexpected cost. For instance, maybe you have a large medical expense you need to cover out of pocket.
If you can get a good interest rate on a personal loan, this might end up being cheaper than what you’d pay through a patient financing solution. A lot of people assume that medical debt attracts lower interest rates than things like personal loans. But this isn’t always the case.
Patient financing is becoming a booming industry, and a lot of the solutions offered to patients are far from cost-effective.
Being able to secure enough cash to meet an emergency expense can protect you from high-interest rates and unfair terms.
Another pro to taking out the maximum personal loan amount you’re eligible for is that you can use this lump sum to lock in lower interest rates and improve your financial health through debt consolidation.
Do you have credit card debt? A large personal loan could be the key to squashing your high-interest debt and consolidating it into one manageable monthly payment that’s easy to keep track of.
A large portion of Americans use their credit cards as a cushion to pay for unexpected expenses. But credit cards have some of the most expensive rates of interest. Average credit card interest rates have soared from 16% at the beginning of last year to nearly 20%.
If you can secure a personal loan with a lower interest rate than your credit cards, this could trigger substantial savings. For instance, let’s say you have a credit card debt of $10,000. Your interest rate is 20%.
Over a year, you would have to pay $2,000 worth of interest.
If you can take out a personal loan with an interest rate of 10%, you could save $1,000 over the course of a year, cutting your interest expense in half.
If you have multiple high-interest debts to pay off, consolidating them through a large personal loan could net you attractive savings. It can also help you improve your credit score and maintain a consistent payment history.
Paying off multiple loans can be tricky, especially if your finances are tight. Consolidating these into one payment can make your finances easier to manage, and allow for better budgeting. Having one payment to make can help you prioritize your debt repayments every month.
Taking out an overly large personal loan isn’t a good idea if you don’t have a valid use for the money. But there are times when having more capital in hand can pay off.
For instance, what if you’re looking to make a series of improvements that will increase the resale value of your home? Most people don’t have the available cash on hand to finance something like a kitchen or bathroom remodel.
However, these types of projects can trigger an advantageous ROI when it comes time to list your property on the market.
At the same time, keep in mind that home upgrades don’t have a guaranteed return. They also can come with hidden areas of expense.
If you want to use a personal loan for things like home improvements, you need to do your research. Figure out what will net you the highest ROI, set a budget, and keep your eyes on the prize.
Doing a light kitchen remodel will probably help you sell your home for a higher asking price. Installing a designer toilet? Not so much.
Depending on your needs, taking out a large personal loan can be beneficial. However, it can also come with inherent drawbacks.
One of the unavoidable drawbacks to taking out a large personal loan is the interest rate costs. The larger your loan, the more you will pay in interest.
If you are loaning more than you need, you will be wasting money on interest payments you could avoid.
However, as we said above, personal loans often attract lower rates of interest than other lines of credit. If you are utilizing a personal loan to pay down high-interest debt, this can result in savings.
Another disadvantage of taking out a large personal loan is it will increase your debt-to-income (DTI) ratio.
This can hurt your ability to qualify for additional lines of credit. Lenders want to know you have enough money available each month to make prospective debt repayments. Having a high DTI ratio indicates to lenders that you’ve already neared your maximum capacity for debt repayments, which places you in a higher risk bracket.
This can drive down your credit eligibility. If you do qualify for additional credit, you might find that the interest rates on it aren’t as attractive as they’d be if you had a lower DTI.
Depending on the terms of the loan, you might also struggle to make the monthly repayments on a high principle.
The more you borrow, the higher your monthly payments will usually be. Before taking out a loan, it’s easy to assume you’ll be able to make the payments.
But meeting large debt repayment month after month can be tough. Ideally, you should have some financial leeway to cater to unforeseen expenses.
If your bills, living expences, and other financial obligations eat up most of your salary every month, even the smallest hurdle can leave you scrambling to make your loan payment.
If you miss a loan payment, this can trigger increased interest charges and damage your credit score.
To avoid this, make sure you carry out thorough monthly budgeting so you can plan out how you will repay your loan.
Speaking of your credit score, this is another thing to consider before taking out the maximum personal loan amount that you qualify for.
Besides increasing your DTI, taking out a large personal loan can also increase your debt utilization ratio. Your debt utilization ratio represents how much of your available credit you have used.
Your credit utilization rate can have a big impact on your credit score.
The more debt you hold, the higher your debt utilization ratio will be.
However, a personal loan could help you reduce your debt utilization ratio if you use it to pay down credit card debt.
Are you struggling to get a personal loan because of your credit score? Check out this guide for some tips.
Taking out the maximum personal loan amount you can, just because it’s available, isn’t a smart idea. Borrowing more than you need will trigger higher interest costs and it can also tempt you into squandering the money.
Here are a few examples of things not to spend borrowed money on:
For most of us, having excess money sitting around can burn a hole in a hole in our pockets. The best way to ensure you aren’t tempted to waste borrowed money is to only loan what you absolutely need.
If you struggle with managing money, and you’re not sure how much to borrow, it’s probably best to err on the side of less rather than more.
Taking out a large personal loan can be advantageous for consolidating debt, paying for a large emergency expense, or making home improvements.
But, a large personal loan can also negatively impact your DTI and credit utilization ratio, and tempt you to spend more than you need to.
A the end of the day, whether you should take out the maximum personal loan amount depends very much on your circumstances and what you need the money for.
Are you looking for a personal loan? Here at Fast Loan Direct, we connect consumers with the best lenders and loan options for their needs.
All you have to do is fill out our simple online form on our homepage to receive tailored offers.