A personal loan is usually given out by a bank or building society and they tend not to ask what you are spending the money on. This means that it is up to you as to what you use the loan for. However, it is sensible to think through why you are getting the loan and what you are spending it on, to make sure that you are making the right decision. There are a number of reasons why you should do this.
A loan will always cost money. You will be charged by the lender for the loan and so it is worth making sure that you really need it. Think about the item that you are buying with the loan and whether you can wait to buy it, perhaps you will be able to save up the money to buy or are expecting to be better off in the future. Think about whether it is necessary for you to buy the item at all or whether you can do without it entirely.
This decision is not as easy as it may seem. If you had to make for someone else, you may say that an item that is a luxury should not be bought at all or you should save up for it so that it is not unnecessarily expensive. Then you might say that if it is necessary and you cannot afford it or wait, then you should take the loan. Although this seems like the logical and sensible approach, there are problems with it. Firstly, judging whether something is necessary or just a luxury is not easy. Sometimes it is clear cut, so buying new cushions to replace some that are perfectly good but just out of fashion would be considered by most to be a luxury whereas paying for a roof repair on a house that is leaking rain water would be considered to be necessary. However, most spending decision that we make are not that easy to slot into a category. For example, is paying for your child’s birthday party a luxury? Well yes, it is a luxury, but if their sibling has had one and their friends have one and they really want one, then the decision is more difficult. Not only does it feel unfair for them to miss out, you have an emotional attachment to the recipient of the party which is stronger than logic.
Right loan type
It is important to choose the right loan type depending on what you are borrowing for. You would not use a personal loan, to buy a house, for example and so you just need to check that it is the most appropriate way to borrow. Some loans, such as student loans, have specific purposes and so you would need to check if one of those would be more appropriate. It is also important to think about the amount of money that you need to borrow. Personal loans tend to be for thousands of pounds and although it can be great to think that you would be getting this much money, you need to consider whether it is too much. Lenders like to lend more money as they acan get more interest if they do. You need to think about how much you need and borrow the least possible, to keep your costs down to a minimum. Therefore a loan that lends less money, such as a credit card, could be a better option. It is worth comparing the prices of different ways to borrow, to see which would be the cheapest for you. Ensure that you compare to total cost of the loan over the time you have it so that you can do a fair comparison of the cost.
Useful repayment term
When considering whether a personal loan is the right type of loan for your needs, you also need to compare the repayment term. This refers to how long it takes to repay the loan. The longer you have a loan for, the more expensive it will get as interest is charged per day of borrowing. However, if you have to repay it all in a very short space of time, it may be hard for you to find the money that is needed and to manage your other bills as well as repay this loan. Therefore it can sometime sbe better to pay more money to repay over a longer period of time so that you can more easily manage your finances. You do not want to risk missing repayments as this can make things even more expensive for you as you will have late repayment fees alongside the interest to pay. There are also future consequences of missing repayments in that you will have it noted on your credit record and it could make it harder for you to borrow money in the future.
So it is not really about choosing whether you are spending your loan on the right things, but worth considering whether you have right loan or whether you even need a loan. It is really important to get his right as it can have a big impact on your future with regards to repaying and the costs and consequences of doing so as well as borrowing in the future. Therefore never borrow money without thinking hard about the decision and making sure that you are making the right for you in your current circumstances. Try to step back and evaluate the decision without being emotionally tied to it. This can be hard, so get help from friends and family and they may be able to see things differently to you. Try to ask those that have a good record with money as they are obviously doing something right for themselves and could hopefully pass that on to you. They may be able to help you to see not only whether borrowing is the right thing for you to do but also which loan would be the right type to help you.