4 Things Never to Buy With a Personal Loan

Don't use a personal loan for the wrong reasons.

A personal loan is one of many options for borrowing, along with credit cards, mortgage loans, and car loans.

Personal loans can be great for some things. If you have essential expenses to pay that you don't have the money for, like medical bills, a personal loan can provide an affordable option with a lower interest rate than many other kinds of debt. Personal loans can also be great for debt consolidation if you can borrow and reduce the rate you're paying on your current debt.

But, while you absolutely should consider a personal loan under the right circumstances, there are also times when you definitely would not want to get a personal loan. Here are four things you shouldn't buy with one.

1. A home

If you're going to buy a house, you're going to want a mortgage instead of a personal loan. The mortgage is secured by the home, so the interest rate you'll pay is going to be lower and, if you itemize on your taxes, you will also be able to deduct interest charges from your taxes. A mortgage is also meant for home-buying so you pay over a long period (such as 15 or 30 years), making monthly payments more affordable.

Personal loans will typically cost you more than a mortgage would, and you may not be able to borrow enough. You also shouldn't use a personal loan to make a down payment on a home, as many mortgage lenders won't allow this and you could risk owing more than the house is worth. Instead of using a personal loan to put money down, wait to purchase a home until you've saved up enough for a reasonable down payment.

2. A car

Buying a car with a personal loan is also typically going to cost you more than if you got a car loan instead. Again, a car loan is a secured loan so the reduced risk for the lender means lower rates for you.

Opt for a car loan with the shortest repayment time you can find and try to put around 20% of the cost of the car down so you avoid ending up in a situation where you owe more than the car is worth. Don't use a personal loan for any required down payment car lenders mandate either, as this can also leave you very vulnerable to owing much more than you could sell the car for (or that you could get from insurance if the car is totaled).

3. Investments

Investing with proceeds from a personal loan may seem smart if you can get a low rate loan and you believe you're going to earn a higher return. The problem is, no investment comes with guaranteed returns, so you could risk losing the money and still having to pay back the personal loan.

The interest you pay on the personal loan is also going to eat away at returns, and there aren't too many safe investments that are going to pay you a much higher rate of return than you'd pay for the money you borrow.

4. Unnecessary purchases you can put off

Finally, you should avoid making unnecessary purchases with a personal loan if you can wait until you've saved up to pay for them in cash instead. There's little sense in paying interest if you don't have to, so just wait until you can afford to pay outright for the items you want.

Avoiding a personal loan in these four situations will help you to ensure you're using your money as wisely as you can and getting the best deals possible in situations where you must finance purchases.