Good and bad reasons for getting a personal loan

Good and bad reasons for getting a personal loan

Some lenders will offer personal loans ‘for whatever you want you to do’ with your finances. While legally that might the case, there are certainly good and bad uses with your financial future in mind.

So, what can personal loans be used for? And what might you be better avoiding? Let’s look at some good and not-so-good ideas.

Good idea: Improving your home

If you’re a homeowner it might not always be possible to extend any borrowing against your house to pay for improvements – so using a personal loan can be a good second option.

Generally speaking, improving your home is going to add to your future financial stability. The better condition and more well equipped your home is will reflect in any future valuation, whether that is to lend more against the house, or to sell it.

Not-so-good idea: A lavish holiday

While it might be tempting to get a large loan to pay for an incredible holiday, it’s often something people regret in the long-term.

A personal loan is generally repaid over a period of around 3-7 years. Meaning your fortnight in the sun is going to still be showing up on your bank statement years after that tan has faded. And if your trip away has ignited a love for foreign travel then be prepared to see that monthly payment increase every time you go away.

If you’re planning a holiday and think a loan to help with the cost, look at the cost of paying it off prior to going away next year to avoid the costs stacking up.

Good idea: Consolidate debts

If you’ve got a number of small debts that could be brought together into one payment a personal loan can be a great idea. Staying on top of the repayments for numerous smaller loans can be logistically awkward, especially if they’re going out at different times in the month – it can make creating and sticking to a personal budget quite difficult.

Not only that, but in cases where interest is applied monthly, paying that debt off can save money – especially when the overall cost is being absorbed by a personal loan at a lower rate.

Not-so-good idea: A luxury item

In a similar way to a holiday, buying a one-off luxury item can be tempting – but you’ve got to be aware that repayments on that item are going to go on for a prolonged period of time – likely to extend well beyond the point that the value and novelty of that item wore off.

This isn’t to say you shouldn’t treat yourself, doing so can be a big incentive to apply effort elsewhere in life – but if you are, perhaps try doing it with finds from another source. There is a finite amount of unsecured personal loan that any one person can access – and if you spend it all on luxury items, you might find yourself with nowhere to turn when you need money for something more pressing.

Good idea: Better yourself

Personal loans are often used to pay for training or education. Although there is dedicated student finance available for higher education, this is often only available if you meet certain criteria, meaning that changes in direction or advanced qualifications can require funds from elsewhere.

In this case, the funds from a personal loan could be seen as something of an investment – increasing your chances to find higher paid and more enjoyable employment in the future, bolstering your finances even further.

Not-so-good idea: Use a personal loan to invest

While we’ve previously said that investing in your own property can be a smart move with a personal loan, there’s a lot of other kinds of investment that can be very risky.

If you’re looking at investing in stocks or shares then using funds from a personal loan is extremely high risk. Not only do you shoulder the normal risk that is associated with investing – but should you lose money, you still need to make repayments, obviously including interest on money that you simply no longer have.

Investments are not for the feint hearted – and if it’s money you can’t afford to lose, it’s not an area to step in to.

It’s up to you

In most cases, lenders don’t stipulate what you can use your loan funds for – but it can have a massive impact on your financial stability. If you’re in any doubt, speak to a professional with experience in the area you’re looking at spending in for good objective advice.

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