When you’re in a pinch and you need to borrow money, you may reach out to a creditor for a personal loan. The upside of this kind of loan is that you can spend the money on anything you choose.
However, just because you can use it for anything, does not mean you should. We have a look at good reasons to take out a personal loan, and a couple of reasons you should avoid.
Tip: If you plan to take a loan out for a good reason, such as noted below, then click here.
Good debt is a good reason – but not the only one
The best way to distinguish good and bad reasons for taking out a personal loan is to consider the distinction between good and bad debt.
Good debt helps you create more money in the long run, such as taking out a student loan, upskilling, and getting a promotion at work. On the other hand, bad debt has no long-term benefit.
However, in some situations, you will have to take out a loan to solve an immediate problem and, even though it’s not considered good debt, you will still be doing it for a good reason.
For example, if you need to settle a hospital bill, that wouldn’t be considered a bad reason to go into debt, because the alternative could mean going into arrears. A better strategy is to have a good hospital plan.
Examples of good reasons, and a couple of bad
Going into debt always sounds negative, but there can be worse consequences if credit is disallowed. Here are some examples of good reasons to take out a loan:
- Debt consolidation: If you’re struggling to meet your monthly repayments for all of your outstanding debt, then taking out a consolidation loan could help you decrease your interest rate and simplify your overall debt burden.
- Home renovations: This is a great example of good debt, because it will increase the value of your property and give you the opportunity to rent out a portion of your home. Both of these will increase your future wealth.
- Emergency assistance: Despite having an emergency fund and insurance, you may still land up in a position where you have to take out a loan to cover unexpected costs. When this happens, it’s best to be practical about it and to make sure you get the best rates.
When it comes to bad reasons for taking out debt, bad debt is usually in the mix. If you’re not experiencing some kind of emergency that forces you into debt, or it won't facilitate long-term gain, then you should avoid it altogether.
For example, if you would like to pay for your wedding, use your credit card to buy a pile of luxury clothes, or take out a loan to go on a long vacation, you will be going into bad debt.
However, it is worth noting that every situation is different, and it’s best to speak to a qualified financial adviser about your finances, including your debt. This article can help you choose a financial adviser to suit your needs.
If you’re certain a loan is the right choice for you, click here.