The other day, my debt-averse husband shocked me when he proposed taking out a personal loan to help pay for our upcoming move to Southern California — one of the priciest regions in the country.
He had just accepted a short-term position at a state university and was confident we’d be able to find an affordable loan to help cover our expenses if the region’s cost-of-living outpaced our modest income.
“It’s an investment,” he assured me. By moving to such a pricey area, we’d be taking the risk that we’ll have to occasionally borrow to help cover unforeseen expenses, such as emergency car repairs or sudden medical bills. But since the new job could help my husband secure a better one in the future, he felt it was worth the risk.
I was dubious. Do low-cost loans for personal expenses even exist? And even if they do, are they ever a good idea?
Limited options for most
There are some lower rate options available, but they’re reserved for an elite few. For example, peer-to-peer lenders, such as Lending Club and Prosper.com, offer rates as low as 6.7 percent on unsecured loans that you can use for expenses ranging from a personal vacation to medical bills. The alternative lending startup Vouch offers rates as low as 5 percent. But you have to have excellent credit to qualify for such exceptionally low rates. Otherwise, you could wind up with rates as high as 35 percent.
Some banks and credit unions also offer short-term personal loans and lines of credit that you can use for personal expenses. But they’re often nearly as expensive as credit cards — and sometimes even more expensive. For example, rates on a $5,000 fixed rate loan from SunTrust Bank range from 7.49 to 9.49 percent for consumers with good credit. Personal loan rates at Citi range from 8.99 to 20.74 percent.
If you don’t have excellent credit, you could have an especially hard time finding an affordable loan. For example, lenders such as AvantCredit will lend to consumers with bad or average credit. But their rates start at 19 percent and run as high as 36 percent.
A risky bet
Since my husband and I have good credit, we may be able to find a loan that charges less than 10 percent. But even then, I can’t shake the feeling that we could be making a huge mistake by even considering taking out a loan for personal expenses.
If we can’t afford to pay for our living expenses now, should we even be thinking about adding more loan payments to our future? We’d be better off rethinking our monthly budget rather than staking our credit scores on another loan. The problem is we’re already so frugal, there’s not much room left in our budget to cut.
The biggest expenses eating away at our paychecks — such as child care and rent — are also unavoidable, making it even harder to trim our monthly expenses.
My husband justifies taking out another loan by the fact that he’s likely to make significantly more money in the future. But even that’s uncertain. If life throws us another curve ball, we could wind up mired in debt we can’t repay.
So far, we haven’t made any firm decisions about what we’ll do. Since full-time infant day care in Southern California costs more than in-state college tuition, we may find that we don’t have a choice but to borrow a little extra to help offset our expenses. What else do you do if your monthly cost-of-living exceeds what you take in? I may be able to take on more freelance work and sell some belongings, but I’m not sure how much further that will take us. Until we actually make the move, I’ll continue to scrimp and save and do everything I can to avoid digging ourselves deeper into debt.