There’s more than a couple of terrible reasons to get a personal loan, and a few might come as a surprise. Sometimes the thought of a lump sum of money in your account to spend on unnecessary luxuries is difficult to ignore. But you might soon pay the price for such a mistake for years to come.
Vacation on the Horizon
Perhaps you’re thinking it would be nice to go on holiday but can’t afford to right now. No problem, just get yourself a personal loan. Wrong! You should save up for something like a vacation and not burden yourself with the idea of paying for it later. If a loan isn’t what you might call mission-critical towards your long-term financial goals then don’t do it.
Financing Your Spending
When you don’t have your spending under control, it would be an awful time to decide to get a personal loan. What if you can’t make the payments, or worse, what if you default. This could follow you for ages and impact your credit score in a big way. Many Canadians debt to income ratio is at a point where their monthly debt payments exceed their monthly income. Having your spending and personal finances under control is essential before looking at personal loans.
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For Life Events
Before you say ‘I do’ to a lender, you might want to rethink taking a personal loan for the purpose of a wedding. As mentioned earlier, if it isn’t mission-critical for your personal finances, it isn’t recommended. The same applies with other life events where you might not want to miss out on something that you currently can’t afford.
When Poor Credit is a Factor
Some advisors suggest getting a personal loan can help raise your credit score. This is not good advice, since the interest-rates that lenders would probably charge people with a bad credit history makes it not worth considering. With higher interest rates you will see higher monthly payments. One of the few times this might make sense is if you already owe for past higher interest loans and could consolidate your debt at a lower rate.
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For School
Thinking of going back to school? While this might be a good idea on it’s own, using a personal loan for education probably isn’t. Find a student loan option that makes more sense and you’ll get better terms and rates probably every time.
The Sure Thing
If you were thinking that a personal loan for an investment like the stock market or similar might help you get ahead, you could be mistaken. No matter what, there is no ‘sure thing’ and this type of use for personal loans might be one of the worst decisions you could make.
Overpaying to Pay Off Debt
While it might seem obvious, it isn’t always the case. If you are looking at personal loans as a debt consolidation solution, you want to make sure that the loan you are considering has a lower interest rate than what you currently owe. The only exception to this might be when you are having trouble making payments. But if that’s the case, you might talk to your lender about the terms to see whether you can negotiate something with monthly payments that work better for your situation.
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Taking a Loan for a Friend
Good intentions aside, if you were thinking of taking a loan for a friend, you have to ask yourself why they couldn’t get one themselves. Also, have you considered what you would do if they were unable to continue to make the payments? Because you would be responsible for the loan, and it’s not to be taken lightly. Even being a co-signer should be carefully considered as you also become responsible for the loan.
For a New Car
Even with excellent credit, using a personal loan for a new car is ill-advised. A personal loan is an unsecured loan, meaning it does not require collateral. When you get an auto loan, the vehicle is the collateral if you have trouble making payments. It’s for this reason that an auto loan usually comes with better interest rates and why you should not use a personal loan to buy yourself a new car.
Starting a Business
So you’ve come up with a business idea and want to get a loan to help you get started. Congrats, but a personal loan is not the answer. Look into other financing options from a small business loan to getting investors to help with the start up costs.
When is the Right Time?
Personal loans are best used for different types of debt consolidation or emergencies when you don’t have much choice. Other reasons might include repairs you can’t afford but need to take care of, or sometimes a large purchase, but whatever the reason it should be done with caution as it’s a financial commitment.
Recommended:
- 5 Things to Know When Looking for Personal Loans
- What is a Benefit of Obtaining a Personal Loan
- What to Know About Personal Loan Rates
- How to Prequalify for a Personal Loan