Should you take out a personal loan when you have savings you can count on?

The quick answer? It depends.

Key points

• Personal loans are a good option to consider when you need money.
• Although you can turn to your savings in some situations, in other cases you are better off leaving your cash reserves alone.
• If you have less money in savings and a higher credit score, you may want to take out a personal loan.

The advantage of personal loans is that they tend to be more flexible and affordable than other borrowing options. Granted, these days personal loan rates are on the rise due to interest rate hikes by the Federal Reserve. But when you compare the cost of borrowing through a personal loan to that of a credit card, it’s easy to see why the former might win out.

Now, a personal loan can be a good option to fall back on when an unexpected bill comes up and you need cash unexpectedly. But what if you have money in your savings account – enough to cover the expenses you face? Should you dip into your emergency fund? Or should you leave your cash reserves alone so the money will be there for another time and take out a personal loan instead?

It all depends on why you are borrowing and how much money you have

Some people take out personal loans for non-emergency situations, such as home renovations. If this is the scenario you find yourself in, you don’t want to dip into your emergency savings to pay for something like new kitchen appliances or an updated master bathroom. But if you’re considering getting a personal loan because an unexpected bill has come up, you might want to consider tapping into your emergency fund if it’s well stocked.

Although personal loans tend to have more competitive borrowing rates than other loan products, in the end you will still pay interest on the amount you borrow. And also, as mentioned, personal loan rates are up right now because everything consumer borrowing rates are higher. As such, you might end up finding that a personal loan isn’t as affordable as you think.

So let’s say you’ve had a problem with your car that you need to fix immediately, and you have a bill for $5,000. You might be inclined to borrow that money and leave your savings intact. But even if your credit score is great, you could easily, at today’s rates, pay 6% or 7% (or more) if you take out a personal loan to cover that cost. And so if you have, say, $20,000 in savings, you might want to dip into that instead, because you’ll still have a good amount of money left over after you make that withdrawal.

On the other hand, if you only have $5,000 in savings, you may not want to empty your bank account to cover your car repairs, leaving you vulnerable in the event of another unexpected expense. So, in this scenario, taking out a personal loan would be a reasonable thing to do.

Weigh Your Options Carefully

Sometimes it pays to get a personal loan even if you have money in the bank. If you do decide to get a personal loan, try shopping around with a few different lenders so you can compare their rates and closing costs. Doing a little research could make your personal loan more affordable at a time when rates are rising across the board.