- Personal loans let you borrow money for any purpose.
- There are certain scenarios where it may not pay to take one out.
- It's not a good idea to use a personal loan to finance a car, a vacation, or a small business without a solid plan.
It's important to borrow for the right reasons.
There's a reason consumers tend to like personal loans. Not only do they usually come with competitive interest rates, but they can also close fairly quickly. Plus, a personal loan allows you to borrow money for any reason, so you get a lot of freedom with your loan proceeds.
But it's important to take out a personal loan for the right reason. And here are a few things you really shouldn't get a personal loan for.
1. A car
Technically, you can take out a personal loan and use its proceeds to purchase a car. But that's generally not your best bet. You'll often find lower interest rates on an auto loan than a personal loan, so the latter could end up being a more expensive option for financing a vehicle.
Personal loans aren't secured, which means they aren't tied to a specific asset. Auto loans, on the other hand, are secured by the vehicles they're financing.
That means if you fall behind on your auto loan, you could risk losing your vehicle. If you fall behind on your personal loan payments, that won't necessarily happen -- but you could face other harsh consequences, like extensive damage to your credit score that makes it difficult to borrow money when you need to.
Because auto loans are secured, they're not quite as risky as personal loans. And in exchange for that lower level of risk, you might come away with a lower interest rate on an auto loan you take out.
2. A vacation
Taking a vacation is a great way to clear your mind and avoid burnout at work. As such, it's an important thing. But you don't need to travel to enjoy some time away from the grind.
If you're low on funds, you can explore your own city or take some time to relax close to home. And if you can't afford to pay for a vacation, it's really not a great idea to take out a personal loan to finance one.
Any time you borrow money, you rack up interest on that sum. So a modest vacation could end up costing a lot more by the time you're done paying your personal loan off.
3. A business idea you haven't really thought through
Small business loans aren't always easy to get. If you can't snag one, you may decide to look at a personal loan instead and use its proceeds for startup costs. But if you're going to go this route, make sure you have a solid business plan first.
Unfortunately, many small businesses fail within a few years. If that happens, you'll be on the hook for your personal loan payments, and at that point, they might constitute a major financial burden.
A personal loan could be a solid borrowing option under a number of different circumstances. But think things through before taking one out. And also, make sure there isn't a more ideal borrowing option to turn to -- one that's more affordable from an interest rate standpoint.
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