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.
When should I consider a personal loan?
There are a few situations where a personal loan might be the financing option to consider:
- Buying a car. This is one of the most common uses for a personal loan. If you don't have the money available but you need to buy a car, a secured car loan can help you make your purchase at a competitive price. Low interest rates are available if you attach the car as security.
- Consolidating debt. Multiple debts across personal loans and credit cards can be consolidated into a debt consolidation personal loan. This will help you pay off your debt within an established timeframe and reduce what you're paying in interest and fees.
- Making a large purchase. If you need to buy new furniture or electronics or even undertake home renovations and you don't have the money you need, a personal loan can provide you with a lump sum or line of credit to help you.
- Funding a wedding. Weddings are expensive, with most costing between $5,000 and $50,000. If you can't save that money before the big day a personal loan may be an option to consider. Secured loan options are also available if you have an asset to use as security, and can bring down the interest rate considerably.
- Going on a holiday. Want to have a break but don't have the money? If you have a stable income and the means to repay the holiday, a personal loan can help you get the money you need more quickly.
What other 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. 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.
- 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.
When should I not use a personal loan?
There are certain situations in which a personal loan may not be the best idea. These can include:
- If you can't afford the repayments. Use a loan repayment calculator to determine how much your repayments will be before you take out a personal loan. Work out a budget and see if you can afford these repayments. If you can't, don't apply.
- 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.