The many ways to use a personal loan
Unlike other types of loans, you can use a personal loan for just about anything.
While the versatility of the loan can be convenient, it’s easy to use the loan in ways that can put you in debt and indefinitely damage your credit score. The interest rates on personal loans are generally low, making them one of the most attractive forms of credit. However, taking out a personal loan should be done after having you have considered your options.
Read below on the right and wrong ways to use your personal loan.
The best ways
When consolidating your debt
Consumers usually apply for a personal loan when they have too many accounts they are paying monthly repayments on. Keeping track of the payments can become overwhelming for many, but debt consolidation reduces the stress of having to remember to pay for the various accounts monthly. Upon approval, you will be able to pay all of your debt with the loan, leading to lower interest rates and less hassle.
Starting a business
Starting a business from scratch can be expensive, and most of the time, business opportunities have costly financial implications. In cases like these, getting a loan can help relieve your finances.
Investing in a business is always risky, as you may not what the outcome will be. But when you’re taking out a loan for a business, you are borrowing money to make money, depending on how profitable your business will be.
When faced with emergency expenses
Life happens, and sometimes we are faced with unexpected events that require money, and in most cases, the money we do not have. Emergencies that may require you to get a personal loan are situations such as repairs for your car, medical bills and home repairs.
Also, debt such as medical bills can taint your credit profile if ignored. Sure, medical aid and insurance are always there to assist with these expenses, but there is only so much they can cover. So taking out a loan can help you avoid your credit score taking a plunge.
The worst ways
Buying everyday items
Your everyday bills may be piling up, or you might be in need of a new set of clothes and sneakers. But a loan is not a solution for everyday items like these. If you find yourself getting into debt with everyday expenses, review your current lifestyle and see where you can cut on costs.
Vacations
Having money in your bank can be tempting. When your personal loan has been approved, and you might have been longing to go on vacation for the longest time. Don’t fall into the trap of using a personal loan for leisure purposes; you will be creating unnecessary personal debt. If you want to go on a holiday, start saving every month and reap the benefits without adding to your debt.
Weddings
Many people fall into the trap of getting a loan for lavish weddings. We get it; weddings are beautiful, and they demonstrate the union of two people who love each other. But, although you will want your wedding to be a memorable experience, getting a loan for your big day will start your union off on a bad footing.
Admittedly, weddings can be costly (if you allow them to be). But if you think about it, once that day is over, the money will be gone. Don’t succumb to the pressures and expectations of those around you. If you cannot afford an expensive wedding, rather save for it.
Stock markets
Investing in the stock markets might seem like a profitable business investment. In theory, you invest money to make money. Unfortunately, that theory doesn’t always work as the markets are very volatile, and you do not have control over your profits.
One of the nice things about taking out a loan is that you do not have to declare what you use it for. This makes it easy for you to misuse the funds, and should, therefore, be responsible enough to know not to misuse your funds on activities such as gambling.
Final thoughts
Ideally, when you want to tackle a big purchase or look into paying off debt faster, you can always use your emergency fund. Many people are reluctant to use their emergency funds for urgent expenses, but what better way to use the money you have than add it on to your debt? Don’t put yourself in unnecessary debt when you could have easily avoided it.
Taking out a loan is not a lifetime financial fix. Unlike revolving credit, you have an allocated period in which you must pay back the entire amount. So, make sure you are making the right decision. Take the time to shop around and compare lenders to get the most suitable interest rates for you.