Pros and Cons of a Personal Loan When You have a Mortgage

Should you take out a personal loan when you have a mortgage? Let’s find out.

A personal loan can be beneficial and risky when you have a mortgage. It’s best to educate yourself on the pros and cons of getting a personal loan when you already hold a mortgage.

It’s essential to weigh personal loans’ pros and cons before deciding, such as the interest rate and repayment terms. For example, are you struggling with how to pay off personal debt while having a mortgage?

What you want to avoid is taking on more debt than you can handle, and the additional debt you do agree to must be the best deal you can get. For example, is it better to get a personal loan or a credit card? You may immediately answer that the personal loan would be cheaper.

However, there are more considerations to understand before jumping to that conclusion.

Knowing your options will help you make an informed decision that works best for your financial situation.

Take Out A Personal Loan When You Have A Mortgage?

The starting point is to learn if it’s viable for you to take out a personal loan when you already have a mortgage. This guide, which includes the following:

• Understanding your financial position
• Analyzing income and expenses
• Funding alternatives

Understanding Your Financial Position

Do you understand your financial situation well enough before taking out additional loans?

Before taking out a personal loan, it’s essential to understand your current financial situation. Start the process of reviewing your financial position by:

• Analyzing your income and expenses
• Assess how much you can comfortably pay in additional debts each month
• Review other alternatives to loans that may suit you better
• Talk to a financial advisor or someone you trust who has the knowledge you need

Analyzing Income And Expenses

Commit to writing down your exact income and expenses on a spreadsheet like Google Sheets. As a PAYE worker, it’s easy to work out your after-tax income. Do you also earn an income from other sources? For example, do you have a second job or a side hustle that’s rewarding you with additional income?

Perhaps you own an investment property, and after covering expenses, you receive a small monthly profit. Record your after-tax income on the spreadsheet to establish a starting point from which all costs will be deducted.

Avoid skimming over your expenses. The only person you will be fooling is yourself. With spreadsheets, you can use a row for each expense. You’ll be surprised by some costs, as they may be small but regular, and they soon add up.

Get an independent person to review your assessment of your financial position so they can alert you to anything you’ve missed that would make a big difference to your meeting your financial liabilities. Additionally, a financial advisor can help you further evaluate your debt and payment options to make the right decision for yourself and your family.

Expenses don’t occur monthly, so you will need to add in costs that may be incurred quarterly, every six months, or annually. Divide these by 12 months to get a monthly amount to save for the payment due.

Once you know your net position at the end of each month, you can assess how much you can comfortably add to additional debts each month.

Funding Alternatives

There are other alternatives to personal loans and credit cards, too, so before you commit to either, consider these alternatives:

• Peer-to-peer loan
• Using your 401(k)
• Crowdsourcing
• Salary advance
• Line of credit

Talking to a financial advisor is recommended, and your accountant will confirm with you what type of loan and the manageable amount. If a personal loan appeals to you, let’s consider the pros and cons of getting a personal loan when you have a mortgage.

Personal Loan Pros

Pros of getting a personal loan when you have a mortgage include:

1. Access to additional funds

There are always times when cash flow is tight, and a personal loan can provide you with extra cash that you can use for various expenses. You may want the funds for a holiday or a new car, both of which seem like ury items you can do without. However, you may need the extra funds for home repairs, medical bills, or debt consolidation.

2. Lower interest rates

Personal loan interest rates are typically lower than credit card interest rates, so if you carry high-interest credit card debt, a personal loan can help you save on interest.

3. Fixed payments

Personal loans usually have fixed payments, making budgeting and financial planning easier.

Personal Loan Cons

There are disadvantages to getting a personal loan when you have a mortgage that are worth considering before you sign a loan contract.

1. Risk of overextending yourself

Taking on additional debt can increase your overall debt burden and make it more challenging to meet your financial obligations. Any additional commitment to outgoings will leave you with less disposable income and cash flow for unexpected events.

A weather event may force you to move out of your home for a while, and that will likely cost you something you hadn’t budgeted for. Or a family or friend’s birthday comes around, and you realize you need to get them a birthday present at the last minute.

If you’ve overextended yourself, you’ll have no funds, and this is when you may have to reach for that credit card.

2. Impact on your credit score

Applying for and taking on a personal loan can temporarily lower your credit score, making it more challenging to get approved for other loans or credit in the future. Ask the tough questions about your credit score and how an additional loan will affect it.

3. Additional payments

Personal loans require monthly payments, which you’ll need to add to your budget. If your mortgage loan is on a fixed term and it’s up for renewal, you may find that the interest rate has increased, and your repayments are significantly higher. The extra monthly payments for the personal loan will likely cause you financial stress.  The contents of this article are not financial advice.  See a financial advisor or accountant for qualified recommendations.