Here is what you should (and shouldn't) use a personal loan for.
There is a range of credit options available to you should you need them, and personal loans are just one of many. So, in which situations should you consider a personal loan and when should you avoid one? Find out in this guide.
What will lenders let me take out a personal loan for?
|Purpose||Can you fund with a personal loan?||Are there other financing options?|
|Vehicle purchase||If the vehicle is eligible, opt for a car loan for lower rates. Unsecured personal loans are also an option.|
|Debt consolidation||You can opt for a debt consolidation personal loan or a balance transfer credit card.|
|Home renovations||As well as an unsecured personal loan, you can also consider a line of credit home loan or construction home loan.|
|Taking a holiday||You can opt for an unsecured personal loan for this purpose.|
|Business use||Some lenders such as Harmoney let you use personal loans for business purposes, but generally, you will be required to take out a business loan.|
What other credit options do I have to consider?
While a personal loan is a viable option for the above scenarios, you also have other financing options to consider. These include:
- Home equity loans. If you're undertaking home renovations, using the equity from your home can also be an option. Work out the costs of this as well as a personal loan to see which one would be a better option.
- Business loans. If you require a loan for business purposes you can compare lenders offering loans from $5,000 to $250,000.
- Credit cards. These can be a good source of ongoing credit and can come with high limits – between $1,000 and $100,000 – that you can use when you don't have the ready money.
- Balance transfer credit card. If you have debt across a few credit cards or even a personal loan, you can consider a balance transfer credit card. These let you pay 0% interest on the debt for an extended period of time.
Will my loan purpose affect my application?
Yes, it can. For example, if you are applying for debt consolidation you may already appear to be a higher risk than someone who is buying an asset, such as a car, or someone who is investing in their property by undertaking renovations. However, it depends on how the lender assesses your application's risk. Ultimately, your eligibility will come down to whether you meet the lender's application criteria and whether you can afford the loan.
When should I not use a personal loan?
While many loan purposes are acceptable, some are not always advised. Here are some situations where you may want to reconsider your loan application:
- If you can easily save the money. Want to take a holiday or buy a new lounge, but it isn't urgent? A personal loan may not be the best option. Work out how much your repayments would be and save that amount each month instead. If you can't wait that long to do what you're planning, save instead.
- If it's a bad investment. Are you thinking of taking out a loan to undertake home renovations or some other investment? Make sure the investment will add value rather than take it away, otherwise you'll be repaying your loan on an idea that lost money.
- If your income and employment aren't stable. You should not take out a personal loan unless you are in a stable financial position. If there is any reason why you think your income or employment situation might change for the worse, don't apply for a loan.