4 Terrible Reasons to Take Out a Personal Loan

Loans are useful financial instruments to help us out in a jam, but there are times when taking one out can be a terrible mistake to make!

Some times you just need a solid chunk of money to help you out with things and that’s fine. There are plenty of personal loans out there with affordable interest rates and fast approval that can really be useful for you in a jam.

However, just because they’re handy doesn’t mean it’s good to use them every single time you need some extra cash. Here are some situations you should never take out a personal loan for, to maintain a healthy cash flow and financial stability.

Financing a Car

Thinking of buying a relatively cheap car in cash with a personal loan? Think again. You won’t be saving much money by doing this since personal loan interest rates are on average, much higher than the interest rates for a regular hire purchase. Furthermore, car loans are secured loans where the collateral is the car itself. Making it much easier for lenders to approve you for it. Don’t take out a personal loan to buy a car, it’s silly.

Paying for Your Vacation

So you’ve planned out your itinerary, places to visit, activities, and everything but you haven’t budgeted out the cash you need to spend on it? Taking out a personal loans is a terrible move to make in order to fix this problem. Why? Because vacations are luxury expenses that you can actually wait and properly plan for. You shouldn’t get into debt just to have some fun. And if it’s a really important family outing you’ve planned out, waiting a little more until you’ve saved enough would be more than worth the potential headache the debt will give you.

Expected Major Expenses

Moving to a new house and need money for furniture, time to replace that broken car part, or a pricey procedure for grandma is coming up? These are expenses you can foresee in your calendar, which means you could have saved up some money to prepare for them. It might make sense to take out a loan if you’re really in an emergency, but it would be better if these kinds of predictable expenses are saved up for. Especially since you know they’re coming.

Consolidating a Loan with a Higher Interest Rate

Loan consolidation is a good way to manage down your debts, but it can turn bad quickly if you don’t pay attention to the interest rates. Remember that when you’re consolidating your debt, the new interest rate should be lower than the highest interest rate of your current commitments. Otherwise you’ll be paying just one bill, which is simpler, but it will cost you much more, which is the opposite of simpler.

So When Should You Take Out a Personal Loan?

Just because we’re cautioning you against taking loans for the above reasons doesn’t mean that personal loans are all bad. There are of course plenty of times where a personal loan is precisely the right thing you need.

In the cases of unavoidable personal emergencies like replacing essential items during a natural disaster, necessary house repair, or other sudden large expenses, a personal loan can be a lifesaver. Especially if you don’t yet have a sizable emergency fund. Just remember to read the terms carefully so you don’t lock yourself into a commitment you can’t comfortably follow through on.

Another scenario would be if you’re trying to consolidate multiple debts under one loan and the interest rates are favourable or more manageable than before. Our tip says to never do this when the interest rates are worse than the individual debts, but when it isn’t, you should definitely do so as it helps a lot.

If you’re thinking of taking a personal loan and are not quite sure if you should, a good rule of thumb is check whether your monthly repayments reach 15% of your monthly income. If it doesn’t, you can go ahead and apply for it. Such a percentage is manageable for most incomes and shouldn’t put you in too much of a headache. We even wrote a full article on what to look for in a personal loan to make sure you’re getting the best deal for yourself.

Now that you know how to use personal loans better and what not to use them for, you can check out the best personal loans on offer in Malaysia on our comparisons page. Borrow responsibly and good luck out there!

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  • Mr. TY ONG

    Very true.

    Reply
    • kin

      Like this info.. very useful ..

      Reply