Personal loans are a financial tool to be used for a wide range of purposes, but what can’t you use a personal loan for? There are certain expenses and activities for which they are not typically recommended or appropriate.
So in this guide, Finance Rate explores what personal loans can’t be used for and why these restrictions exist, so you can make informed decisions about your borrowing and avoid financial or even legal repercussions in future.
There are many types of loans, and one type of loan is a personal loan. Using a personal loan to invest in speculative ventures like trading in the stock market or investing in cryptocurrencies carries a high level of risk, and there’s no guarantee of a positive return.
If your investments do not perform well, you may find yourself in a precarious financial situation, struggling to repay the loan. For this reason, it is considered something you can’t use a personal loan for.
Luxurious or extravagant purchases
While personal loans can be used for a variety of personal expenses, they should not be used for luxury purchases that are beyond your means.
Financing expensive vacations, designer clothing, high-end electronics, or luxury vehicles through a personal loan can lead to unnecessary debt and financial stress.
It’s wise to save and budget for such purchases instead of relying on borrowed funds.
Repaying other loans
Taking out a personal loan to repay other existing loans might not have the desired outcome especially if the new loan has a higher interest rate than the loans you’re trying to pay off.
This practice can create a cycle of debt and may not provide a long-term solution to your financial challenges.
Instead, consider debt consolidation options with lower interest rates or consult a financial advisor who specialises in debt management.
High-risk business ventures
Starting or expanding a risky business venture with a personal loan can be seen as an improper use of a personal loan.
If the business does not succeed, you could find yourself with a substantial debt burden and limited income to repay it.
Business financing options, such as small business loans or equity investments exist for this purpose and may be more suitable for entrepreneurs.
Non-essential home renovations
When asking yourself ‘what can I use a personal loan for?’ property and home improvements may jump to mind. While using a personal loan for necessary home repairs or improvements that enhance the value of your property can be a sensible choice, it’s less advisable to finance non-essential or purely cosmetic renovations through a personal loan.
These types of projects may not provide a return on investment that justifies the interest costs associated with the loan.
Using a personal loan for daily living expenses
Personal loans should not be used to cover everyday living expenses, such as groceries, utility bills, or regular monthly expenses.
Relying on borrowed funds for routine expenses implies an income and expenditure issue and can lead to a cycle of debt and financial instability.
Instead, it’s essential to create a budget, manage your day-to-day finances within your income and seek out guidance or financial advice if needed.
Investment in ambiguous, risky schemes
Be cautious when presented with investment opportunities that promise quick and guaranteed returns but sound too good to be true.
These schemes may turn out to be fraudulent. Using a personal loan to participate in such schemes can result in financial loss and legal consequences.
Unexpected or volatile expenses
Personal loans may not be suitable for covering unpredictable or volatile expenses like legal fees. While they can provide quick access to funds, it’s often better to have an emergency fund for such an event.
You can also consider alternative financing options, like payment plans or legal aid services, for such unforeseen costs.
Repaying friend or family debts
While you may want to help friends or family members in financial need, using a personal loan to repay their debts is not advisable.
If you decide to lend money to loved ones, do so from your own funds rather than borrowing, as it can strain your own financial situation and relationships.
Non-essential education or training
While personal loans can be used for educational purposes, they should be reserved for essential education or training that can enhance your career prospects or earning potential.
Financing non-essential courses or hobbies through personal loans may not provide a sufficient return on investment to justify the debt.
Using a personal loan to finance recreational activities or hobbies, such as buying sports equipment or funding a hobby project, is generally not recommended.
It’s better to save for such activities over time rather than incur debt for them, you may just end up regretting the enjoyable activity afterwards.
While weddings are special and significant events, financing wedding expenses through a personal loan may not be the most prudent choice. Consider creating a budget and exploring less costly alternatives to ensure a memorable wedding without accumulating unnecessary debt.
Personal loan payments
Using one personal loan to pay off another, also known as “loan stacking,” can lead to a cycle of debt and financial instability. It’s important to manage your existing loans responsibly rather than relying on new loans to cover old ones.
Personal loans should not be used for any purpose that jeopardises your overall financial stability or ability to repay.
Helping you get to grips with personal loans
At Finance Rate, we want you to be aware of the risk factors attached to misusing a personal loan ahead of time so you don’t land yourself in a bad position later down the line.
The more information you have to work with about all things finance, the less intimidating these topics can be. For example, if you’re trying to get a loan for starting a business, as opposed to a personal loan, or you’re looking to purchase a house and want a better grasp of mortgage loans, we’re here to give you the facts.