A personal loan can be a great way to make up for lack of savings, a sudden medical expense, or any other cash flow problem you may have in your life. However, there are some uses for which a personal loan should never be used. Here are the top things you should never use a personal loan for.
If you need extra money to fix your home, have a wedding, or pay down high-interest debt, then you might want to consider taking out a personal loan. Used prudently, a personal loan can do the trick while safeguarding your house and other assets.
What a personal loan is and how it works
A personal loan is any type of loan that isn’t taken out for commercial purposes. They are usually granted on a case-by-case basis and require an application process, which will include asking questions about your finances and what you plan to use the money for. The interest rates on these loans will be higher than those of other types of loans because of the increased risk that lenders take.
In order to qualify for a personal loan, you must first enter your personal information, your financial information, and the loan details. You may temporarily lose credit score after the lender performs a hard credit check before approving you. It is also possible to take out a loan against life insurance policy
As soon as you receive the personal loan funds, you’ll begin making payments, and your payments will be the same every month until the loan is repaid: your principal plus interest is credited to your account.
Must Read: How To Identify Loan Scams IN South Africa.
How to decide if a personal loan is right for you
If you have an emergency situation and need cash quickly, it is tempting to take out a personal loan. But, if you can wait until you get your next paycheck or can ask for help from family or friends, that might be better.
If you need to borrow money for something other than emergencies—like to buy a car or pay off medical bills—you may want to talk with your bank about other options before taking out a personal loan.
5 Things Not to Use a Personal Loan For
In spite of the fact that personal loans can be a versatile way to finance purchases, there are a few purchases you shouldn’t fund using one. Here are five expenses you shouldn’t fund through a personal loan.
1. Investing
In general, a personal loan isn’t meant to be used for investing. If you’re able to generate a substantial return on your investment, your interest rate will eat into it. Because personal loans have repayment terms ranging from one to five years, the longer you pay, the more interest you’ll pay.
What will you do if your financial situation changes, if the markets are unfavorable, or some other unfavorable circumstance arises? It’s wise to have a backup plan for covering your loan payments in such a scenario, or it may even be wise to not take out a personal loan for investing purposes at all.
2. Putting a Down Payment on a Home
Instead of using your personal loan for this, take out a home equity line of credit. That way, you’ll have access to cash when you need it. Plus, the interest rate on your HELOC is usually lower than what you would get with a personal loan. If you do want to use your personal loan for this purpose, make sure you’re aware that there’s typically an origination fee of around 2-5% of the amount borrowed.
Taking on new debt, such as a personal loan, could also signal to a lender that you lack the financial strength to purchase a home.
3. Starting a business
You may qualify for a personal loan—from a few hundred dollars to R10000—to launch your business, but it may not be the best idea.
It is unfortunate that personal loans do not help build business credit. Instead, your lender reports your payments under your name, not that of your business, to the credit bureaus. Failure to repay the loan may result in your lender suing you to collect.
4. Bad Habits
This is for the people who have trouble finding motivation. You know, those who can’t seem to get out of bed in the morning or those who are always procrastinating. It’s ok that you’re not perfect all the time because no one is, but if you find yourself in this situation more often than not then it might be time to take a step back and start looking at your habits. One habit that should be addressed right away is your need for instant gratification. Why?
5. Vacation
Many people often resort to personal loans for vacations when they are in need of extra funds. Unfortunately, using a personal loan for this purpose can be detrimental. Whether it’s because you have large monthly payments or you don’t have enough income, here are five things not to use a personal loan for.
What Can I Use a Personal Loan For?
Personal loans are not always the best option, but here are some reasons why they are:
1. Consolidating high-interest debt
If you have a few credit cards or lines of credit with high interest rates, a personal loan could consolidate them into one with a lower interest rate.
2. Paying emergency medical bills
Even if you have outstanding health insurance, a substantial medical bill can require you to pay your annual deductible in one lump sum. Personal loans can be a cost-effective way to manage a large medical bill, but see if your provider offers payment plans first. You may be able to do so without paying interest in some cases.
3. Funding home improvement projects
It can be a good idea to use a home equity loan or a HELOC to secure financing if you’re looking to buy a home improvement. Keep in mind, though, that home equity loans do come with a risk, so be cautious about putting up your home as collateral.
Read Also: All you need to know about loan to value.
Conclusions
It’s important to remember that personal loans are not appropriate for every situation. They are, however, an effective way of getting the money you need in order to get back on track. Following this advice can help you decide if a personal loan is a right choice for you. Check out 5 great reasons to borrow money.