Every SMS seems to be offering you a personal loan. Banks entice you to borrow money, while your instinct tells you to delete the message instantly and never look back. However, there are times when you could consider a personal loan as a viable option. Some reasons make more financial sense than others, such as when you’re using the loan to pay off high-interest debt. That said, there are many less-worthy reasons, so here are a few tips to help you decide.
When personal loans make sense
Paying off high-interest debt with a personal loan is smart. If the interest rate on your credit card debt, for example, is considerably higher than the interest rate on a personal loan, then you could ultimately save on interest. Do your research carefully before signing on the dotted line.
Furthering your education is another reason to consider a personal loan, considering it can help advance your career. Unfortunately, student loans aren’t available for all academic disciplines, so if you have a clear budget in place for paying it back – it could be your best financing option.
Some personal loans are a personal choice
Home renovations should increase the value of your home. This means that a personal loan to finance house upgrades could make financial sense. However, there may be other options out there that will offer you a better deal. It’s important to always compare interest rates.
Business costs can set you back. If you don’t qualify for a business loan, then, again, a personal loan could be the best option. However, note that a personal loan provider will only consider your personal credit history and not that of your company, which can go either way.
On the plus side, it means your business won’t need to meet any requirements before the loan is granted. This does mean that you will be putting your personal credit on the line, though. Personal loans also offer much less than business loans.
When personal loans are a bad idea
A wedding, honeymoon or holiday might seem like an impossible expense, but experts warn that it’s unwise to use a personal loan to pay for these events. If you can’t afford to pay for it outright, then the best thing to do is save up until you can. Do you still want to be paying for your holiday, or wedding, in four years’ time?
Upgrading your TV set, lounge suite or wardrobe is also an irresponsible way to spend a personal loan. Financing these types of purchases with a loan is a slippery slope because you’re racking up debt that you can’t afford and jeopardising your financial future. If you can afford it, rather buy the items outright. If you can’t, then ask yourself: do I really need it right now, or can it wait?
Similarly, don’t buy a car with a personal loan. Rather look to a specialised vehicle loan which will have lower interest rates than a personal loan.
It’s tempting when you receive correspondence from institutions who are dying to give you a personal loan. But it only makes sense if you are using it to save money on interest. Otherwise, save up – it’s not that hard! It’s a great learning curve and delayed gratification is often worth the effort.
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