According to TransUnion, credit card balances reached record levels in 2022 as consumers navigated high inflation. Plus, with rising interest rates, borrowing is more expensive.
If you’re dealing with a hefty credit card balance, you might feel a little anxious about talk of a looming economic recession. You may also be eager to find more stable financial footing.
If this sounds like you, a personal loan might help. With a personal loan, you can consolidate high-interest credit or fund an emergency expense at a lower interest rate. Read on to learn how a personal loan can help you navigate the uncertainty of a recession.
3 reasons to get a personal loan during a recession
You may wonder, “is it good to take a loan during a recession?”
While it may seem counterintuitive, there are several scenarios—even during an economic downturn—when getting a personal loan can help.
1. Debt consolidation
When a recession is imminent, experts often advise paying off your credit card and other high-interest debt. That’s because lowering your overall financial risk, by creating a solid plan for managing debt, makes dealing with the challenges a recession can bring easier.
A personal loan allows you to consolidate your high-interest debt into one, lower-interest payment. It might go without saying, but before consolidating debt, make sure your new loan has a lower interest rate than your current rates.
Note that using a personal loan to consolidate debt can extend your repayment terms. That’s not necessarily a bad thing, but it could mean being in debt for longer.
If you’re unsure whether debt consolidation is the right move for you, check out our guide to debt consolidation. You can also enter your current debts into our loan calculator to estimate how much it could help you save.
2. Emergency expenses
Unfortunately, emergencies happen. And though the timing couldn’t be worse when they arrive during a recession, most emergencies have financial implications.
As much as you try to plan, some things simply come out of the blue. These emergencies include things like:
- Medical bills: In 2020, the average emergency room visit in the U.S. cost $1,150.
- Auto repairs: According to a AAA survey, 1 in 3 Americans can’t pay for an unexpected auto repair without borrowing.
- Home repairs: In 2022, homeowners in the U.S. spent an average of $1,953 on emergency home repairs.
Often, these emergencies require quick or immediate payment. A personal loan can come in handy in these emergency situations, because many online lenders fund loans within days.
3. Education
An impending recession might have you rethinking your career. If you’re unsure about your job security, you might wonder what else you could do to make a living. Even if you have a job you love, you might want to spruce up your resume.
A personal loan isn’t going to pay for you to go back to school full-time. That’s what student loans are for. But say you wanted to take an online course or workshop to learn a new, marketable skill—a skill that could help you land a higher-paying job. In this case, a personal loan can help.
While investing in your skills can be a great way to build resilience during a recession, don’t take out a loan without thorough consideration. Make sure you have a plan for getting a return on your investment.
Potential drawbacks to getting a loan during a recession
If you’re asking, “is it good to take a loan during a recession?” you’re asking a fair question. While there are certain benefits to getting a loan during tough times, you also have to consider what happens in a recession:
- Everything is riskier. If you were to lose income, it’ll be harder to make payments on a loan. Consider your income streams, job security, and ability to get a new job before applying for a loan.
- Everyone is more vulnerable. That includes lenders and borrowers. Lenders might worry that borrowers are less reliable due to unstable financial conditions. That makes lenders less willing to offer loans.
- If interest rates drop, loans are harder to get. Because banks won’t earn as much on loans, they have less incentive to offer them.
Know that if you apply for a personal loan in a recession, it may not be easy to qualify—even when it’s a smart financial move.
Tips to improve your creditworthiness and qualify for a loan
Improving your creditworthiness is the best way to qualify for a better loan. Check your credit report first, then use these tips to improve your creditworthiness.
Make payments on time
Paying your bills on time is the factor with the biggest influence on your credit score. Missing even a single payment can hurt your credit score, and late payments can remain on your credit report for up to seven years.
If you have any late payments, catch up as soon as possible—then make sure you don’t miss any payments moving forward.
Reduce credit utilization
After payment history, your credit utilization is the biggest factor affecting your credit score. Your credit utilization is how much of your available credit you actually use. The more available credit you use, the riskier you look to lenders.
There are a couple of ways to reduce credit utilization. First, you can put fewer charges on credit. And second, you may be able to increase your credit limit. Call your credit card company to ask for a higher limit, and make sure they don’t do a “hard” inquiry—which can lower your score in the short term.
Is it good to take a loan during a recession?
It might be, depending on your situation.
Recessions can feel uncertain no matter what kind of financial situation you’re in. But when you’re in a pinch and need cash, they feel downright scary.
Luckily, personal loans can help. Whether you experience unforeseen bills, need to change career directions, or want to consolidate your debt, getting a personal loan could be the right financial move.
Written by Cassidy Horton
Cassidy Horton is a finance writer who’s passionate about helping people find financial freedom. With an MBA and a bachelor’s in public relations, her work has been published over a thousand times online by finance brands like Forbes Advisor, The Balance, PayPal, and more. Cassidy is also the founder of Money Hungry Freelancers, a platform that helps freelancers ditch their financial stress.
Read more:
- Your Credit Score Just Dropped: Here’s Why
- What To Do With Your Tax Refund
- Debt Consolidation Loan Calculator
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