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A consumer loan gives you flexibility and the opportunity to spend money as you see fit. Unlike credit cards, these loans are usually provided with a lower interest rate and a longer down payment.
Here we take a closer look at the right time to use a consumer loan, and vice versawhen it is not.
When might a consumer loan be the right form of financing?
An unsecured loan means that the debtor does not need to provide security for the loan. However, the lender(s) have other ways of getting their money back so this should not be misinterpreted.
These loans are better suited to individuals with stable finances. In other words; People with stable income and a low to moderate degree of household debt.
With a good credit score, you will also get rewards with lower interest rates. This is because the risk of default is lower, from the banks’ perspective.
Unsecured loans are also wise in cases where there are no realistic ways to secure the loan. For example, you would never finance your home in this way (that’s why we have mortgages), but you might want to use it for other purchases that can’t be insured.
Unsecured loans should also be used to finance goods of long term value. For example, to build a shed where you can work on your hobbies or a lawn mower that will last for many years.
What should not be used?
Here is a short list, with some of the items that should not be financed with unsecured loans:
1. Fixed monthly costs: Unless we’re talking about a one-time exception (say your laundry machine is broken), you should never use it for your fixed monthly costs.
If you cannot afford these expenses on a monthly basis, then this is an indication that your family budget is under severe stress. Borrowing money to pay bills will only add to the financial stress on your family.
2. The first payment on the mortgage: You must not fund your down payment requirement with anything but your own savings. There are several reasons for this, but the main one is related to the financial risks you take.
If interest rates go up (or if you lose your income), you’ll have severe problems covering your monthly mortgage bills. An unsecured loan will only add to the stress of the situation.
Also, let’s not forget why banks are required to require a down payment in the first place. It makes you get less financial opportunity when you sign the mortgage.
3. Interest on other loans: This may seem obvious, but it should not be ignored. Never use a consumer loan to pay interest on other loans. You are just pushing the problem in front of you, adding fuel to the fire.
