Personal loans can be a very helpful tool if you find yourself in need of that little extra financial boost. These loans are flexible and can be used for just about anything.
From debt consolidation, to house renovations, to even funding your wedding, personal loans can help fill the gap. They can be paid back quickly in monthly installments over the course of a few months or a few years.
When used smartly, personal loans can even improve your credit score in the long run and enrich your quality of life. However, just because you can, doesn’t mean that you should use a personal loan for everything.
Here are a few things that you really shouldn’t use a personal loan for.
Starting a business
You may qualify for a personal loan to help you launch a business, but it really isn’t the best idea. Personal loans generally do not help you build business credit. Instead, your lender reports your payments to the credit bureaus in your name, and not under the business.
As such, failing to repay the loan can have dire consequences to you directly. Your your lender could attempt to collect from you personally, and potentially sue you. Using a personal loan for business purposes also means borrowers are less likely to get tools and support tailored to small business owners and startups.
Additionally, personal loans also have shorter repayment periods and higher interest rates than traditional business loans. This can reduce your cash flow and make them a less desirable option overall.
Investments are risky by nature. While there are both high-risk and low-risk investments, there is always a chance that you lose money. The money you gain or lose through investments can vary dramatically, yet you will still be required to pay back your loan each month regardless.
You will need to make sure that you are able to cover your repayments at a comfortable rate. You simply can’t do that if you use borrowed money to invest. Some banks and lenders might even refuse to approve your application if they realise that you might be using your loan to fund investments.
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Cryptocurrency has been in a rough spot for awhile now. However, even on the best of days, cryptocurrency is a risky investment with no guarantees that you will get your money back. Even if you lose the money you spent on cryptocurrency, you will still have to repay your loan. Then you will be responsible for paying a fixed amount each month (including interest charges) with nothing to show for it, potentially landing you in a debt spiral that you might not be able to recover from easily.
Those who do not have enough personal funds to invest in cryptocurrency are perhaps not in a position to withstand financial losses. As such, this is why it is never advised to get yourself into debt in order to invest.
Using a personal loan to fund a house deposit more or less means you are taking out a 100% mortgage which can be a potentially huge risk. This is besides the fact that you might not get accepted anyway. Like most lenders, mortgage providers will review your credit risk and affordability. This will generally involve taking a look at your debt-to-income ratio, which is a comparison of how much you earn with how much debt you owe each month.
When a personal loan is used to fund a house deposit, it will increase the amount of debt you have. As such, your mortgage application might get affected as a large amount of debt to your name might indicate that you do not have enough disposable income leftover to afford any further repayments.
Most mortgage providers may also ask for proof of deposit funds as well, and will not accept your application if you have used unsecured borrowing (e.g. personal loans) to fund your deposit. In the unlikely event that you are accepted, you will probably be offered an extremely high interest rate which will make your mortgage repayments more expensive.
Everyday living expenses
Personal loans should never be used to assist with day-to-day costs, such as household bills. While a personal loan may indeed be a viable option to help you address a temporary hardship, it is only a truly viable option if you have a well thought out plan to get yourself back on your feet financially and repay the loan. However, you could create a more significant problem in the long run since you will have to repay all the money you borrow plus interest.
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