The fact that you qualify for a personal loan doesn’t mean you should sign that loan agreement without taking into consideration what you want to use it for. These are some reasons you should not take a loan
Buying a car
Unlike an unsecured loan, an auto loan is secured debt that’s guaranteed by collateral — typically the car you’re purchasing. If you’re unable to repay the debt, the lender can repossess the car and sell it to recover the money it lent you.
Since auto loans are structured this way, there’s less risk to the lender. And because there’s less risk, auto loans are often easier to qualify for and carry lower interest rates than personal loans.
Personal loan rates are higher than those offered on auto loans, and the term is less than half. Basically, with a personal loan, you’d have to pay more than twice as much interest and pay off the loan in less than half the time. For car buyers, it’s simply not a good deal.
Consolidating smaller debt
One of the most popular uses of personal loans is consolidating or refinancing debt. A personal loan used to consolidate debt can result in simpler money management and a lower interest rate, which will save you money on interest payments. However, debt consolidation could be too much hassle for little reward. Instead of using a personal loan to refinance small-balance debt, consider performing a balance transfer with zero-interest. You also can up your payments and knock out the balance without moving it to another loan.
Paying for a vacation
Most people are too willing to borrow to finance their getaways, according to a recent survey by a financial planning company. Meanwhile, vacations are non-necessary purchases you can save and plan for. If you have to take out a personal loan or use a credit card to pay for vacation costs, that’s a red flag that you’re buying something you can’t afford. Even worse, interest charges add to vacation costs. So, by definition, you’re paying more for your trip than it’s worth. Instead of using a personal loan to pay for a vacation, plan a less expensive trip closer to home that you can pay for in cash. Or delay the expensive vacation and make a plan to save up for it.
Paying tuition
Figuring out how to pay for your children’s school fees isn’t easy, especially in this period of economic recession. Personal loans are one option, but they shouldn’t be your first choice. Whether you should take out a personal loan will ultimately come down to your situation and financial goals.
If you do have a real need to borrow, be smart about it and find the product that makes sense — it doesn’t have to be a personal loan. Sometimes, it’s better to delay a purchase, save and pay in cash instead of burdening yourself with more debt.
Covering expected major expenses
When you’re facing an emergency or time-sensitive expense, a personal loan can be a cost-effective way to borrow the funds you need. For example, personal loans could be used to fund home improvements. Some home repairs, from a leaky roof to a broken door or window, can’t be put off. In those cases, a personal loan can help you fund repairs to maintain a functional home if your on-hand cash won’t cover all the costs. But there’s a big difference between an unexpected expense and one you simply failed to plan for. Remodeling your kitchen, for example, can wait. Living with an outdated kitchen for a year or two while you save up is worth it to avoid unnecessary debt.
You also might be considering a personal loan to pay for a cross-country move, starting a family or another major life event. If you know you want to take these major life steps in the future, that calls for a savings plan — not a personal loan application.
Paying for marriage ceremony
Frankly discuss with your spouse-to-be on your aspirations and expectations of your wedding. Work out a budget together and mutually agree on the areas of expense. Know what your partner expects on the wedding day and if you think that it will lead you to exceed the budget, then be clear about it.
When embarking on life’s journey with a new partner, you don’t want to start off on a rocky note. The idea of a wedding should be mutually agreeable to both parties. Avoid ostentatious venues, decors and menu items. Go simple, elegant and most importantly, be practical. Understanding is the key to the success of one’s matrimony. Financial differences are quick to seep into relationships and cause bitterness. To ensure your marriage succeeds, dodge confrontations and be open to discussion. Your life partner should be an equal ally in all your life’s decisions. A misstep can lead to havoc in their lives too. While taking a loan to finance your wedding may sound alluring, remember that you will be responsible to pay it back in future which will affect your future earnings and lifestyle.
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