What you should and shouldn’t spend a loan on

There will come a time in most of our lives when we’ll need to turn to loans. Whether this is due to buying a house, going on holiday or paying for education, loans are the way through. 

However, loans are a big decision that will have knock-on effects on your finances in good ways, and, sometimes, harmful ways. If you aren’t wise with your loan, it can come to haunt you later. 

Whether you are taking out personal loans or bad credit loans, there are several pitfalls to avoid. 

What you should spend your loan on

In short, you should spend your loan on the thing you have planned to spend it on. Don’t overspend if you find yourself with leftover money, and don’t change your mind after getting the loan, and decide to spend it on other things.

It is vital to match your loan to your planned spending. For example, don’t use a personal loan to buy a house. Similarly, don’t use a homeowner loan to fund your wedding. 

Here are some examples of purchases common amongst loan users:

• Buying a house. A mortgage is one of the most common loans. If you haven’t already, you’ll probably end up getting a mortgage at some point. 
• Buying a car. As it’s less expensive, often a personal loan will do for buying a car. This, again, is a standard purchase with a loan, as many require vehicles for transport to and from work. Depending on the cost of the car, the amount covered by the loan will change. 
• Funding a wedding. Weddings are reaching incredibly high expense levels, so many are taking out loans to cover the cost. 
• Home improvements. The level to which home improvements are needed will affect the size of the loan. If it’s mostly decorative, it will be lower than if structural changes are required. 
• Furniture. Loans are sometimes required for smaller items, like washing machines or dishwashers. As these loans are smaller, they can be repaid quicker. 

Though the reasons for taking out a loan can be varied, it must be easily repayable whatever your loan is for. 

You should only take out a loan if it is within your means to repay it. You should consider any changes coming up in your finances, and cater to any unexpected issues. Of course, as they are unexpected, you can’t plan properly, but by considering that something might happen, you can be more prepared if it does. 

The consequences of not paying back a loan can be problematic. From fees to poor credit, the damage can last for a significant amount of time. 

Part of deciding what you should spend your loan on is deciding whether or not you should get a loan at all. As long as you are careful and consider all aspects, you should use your loan successfully. 

What you shouldn’t spend your loan on

There are many pitfalls you can fall into when using loans. As previously discussed, the consequences can be massive. So, to avoid this, making sure you know what not to use your loan for is just as important as knowing what you can spend on. 

The first and most important thing to avoid is spending your loan on any form of gambling – including investing. 

With gambling, there is no guarantee you will get any money back in return. You can lose all of your loan money, and be left with extra difficulty in repaying the loan. Suppose it is assumed that, using the loan to gamble more money seemed a good idea due to already existing financial difficulty. In that case, failed gambling is only going to exacerbate the problem. 

Though mortgage loans for a property are typical, using a loan for a property deposit is not a smart move. When mortgage providers hear how you paid for the deposit (i.e. through a loan), they are most likely to turn you down for the mortgage. Once you’ve been turned down for the mortgage, your chances are getting the property are significantly reduced. Plus, if you need to take out a loan for the deposit, your financial status suggests you’ll struggle to pay both the deposit loan and the mortgage back.

Another issue to avoid when using a loan is taking out a loan for someone else. Whether this is a family member, friend or partner, it is a bad idea in all circumstances. The issue this presents is in the case that they cannot keep up with repayments. If this happens, the responsibility for repaying falls on your shoulders, as it is your name on the contract. 

Here, either you option is to pay it yourself, despite not benefiting from it, or facing the consequences of unpaid loans. You may end up with a bad credit score for a loan that wasn’t even for you. These issues will continue, even if you fall out with this person, as you’ve signed your name. 

Using loans to cover everyday living costs – such as food, rent or utilities – is a poor financial decision. If you can’t cover these aspects of day-to-day living, your finances are already clearly in a bad place, and adding the repayment of a loan to this will only cause harm. If you can’t afford food, you can’t afford to repay a loan. 

On the other end of the spectrum, using loans to fund a “lifestyle” can only cause problems. Backing up an unsustainable level of spending when you no longer have the funds to keep it up yourself will only lead to financial ruin. Instead, look to change your habits and live within your means. 

When to use a loan

When it comes to loans, being careful and planning ahead is the way to avoid any financial messes. Talk to financial advisors if you are unsure that a loan is the way forward.

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Image by Jose Conejo Saenz