4 Things I'd Never Use a Personal Loan to Buy
KEY POINTS
- Personal loans can be an affordable way to borrow, but it's still important to make sure you borrow for the right purchases.
- There are certain things I would never take out a personal loan to fund, including a car or a vacation.
Don't take out a personal loan for the wrong reasons.
Personal loans tend to come with lower interest rates than many other kinds of debt such as credit cards. Because of this, and their predictable payoff timeline, personal loans can be a great way to borrow in order to refinance more expensive debts or to fund essential big purchases you cannot pay for all at once.
But, while personal loans may be more affordable than other kinds of borrowing, you still have to pay interest when you use this kind of financing. As a result, there are four things I would never consider using a personal loan to purchase. Here's what they are.
1. Making investments
While I'm a big proponent of investing, I would never take out a personal loan to buy stocks, cryptocurrencies, or any other type of investment. There's a few reasons why.
First, I wouldn't want to risk having to sell investments at a loss in order to generate money to pay off my personal loan. If my loan payments were due and the market was down, I might have to lock in losses by selling in order to send the money back to the bank.
Second, the interest on the loan would likely be high enough that it would be really difficult to find investments likely to produce a much higher rate of return. I wouldn't want to buy high-risk investments and take the chance of losing the borrowed money entirely, and lower-risk ones likely would simply not produce enough to pay the interest on the loan and also end up with a noticeable profit.
2. Buying a car
While using a personal loan to buy a car might seem like a good idea, it's not something I would do. In general, I try to pay cash whenever I have to purchase a vehicle. That's because cars go down in value over time and I don't like to borrow for something that is going to be worth less than I paid for it since then I get a double-whammy of losses -- I have to pay interest and take a hit due to depreciation.
If I did have to borrow to buy a vehicle, I would likely also opt for a car loan rather than a personal loan. In most cases, the interest rate on the car loan would be lower due to the fact it is a secured loan, so it presents less risk to the lender.
3. Buying a house
A personal loan would also be a bad option for buying a house. There's a lot of reasons for that, including the fact it would be difficult to borrow enough to pay for a house since most personal loan lenders have limits on the maximum amount you can borrow. I would also opt for a mortgage instead of a personal loan, even if a personal loan was available, since mortgages have tax-deductible interest and tend to come with lower rates than personal loans.
4. Paying for a vacation
Finally, I would not use a personal loan to pay for a vacation because a vacation is a luxury and not a necessity. I don't want to end up making my trips cost more by paying interest on them, nor do I want to spend years paying for a vacation that's long over. Instead, I won't go on trips unless I've saved up to pay for them outright.
In general, I believe a personal loan can be a great option, but it should be used to help improve your financial situation or to pay for true essentials, rather than to make risky purchases or to buy assets that could come with more affordable financing alternatives.
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