Published On: Thu, Dec 28th, 2017

Ten Things You Should Not Use a Personal Loan For

Taking on a personal loan can be necessary sometimes. Many people, however, use finance deals the wrong way, and end up losing money on interest and repayment charges. There are times when taking out a personal loan might be the right solution, and financing large purchases today is almost impossible without finance. Long decades ago, people were able to buy a house from a few months’ wages, and it took them only a few years to save up for a home. Today, it is almost impossible for some. Likewise, it used to be possible to save up for a car in a year or two, while – due to the increased cost of living and housing – now it is just a dream. If you would like to avoid financial difficulties, you should use your finance options carefully and cleverly. Below you will find ten things you should not buy on finance.

  1. Rent Deposit

You should always save up for your rent deposit, instead of taking out a loan. You will end up paying back much more, and you will only need the money for 6 months to a year, until it gets refunded by your landlord. Some banks and financial companies have a policy against lending you money on anything that is related to housing costs. You should save up for your removal company bill, as well as the furniture, so the deposit should not be treated differently. If you are moving from a rented accommodation to another rental property, chances are that you will get your previous deposit back when you move out. If you are just getting your first place after moving out from your parents’ home, make sure you are ready to take responsibility and cover the rent and deposit as well.

2. Starting a Business

The majority of businesses in the UK fail in the first few years. If you are thinking about opening a store on the high street, the cost of getting established will reach tens of thousands of pounds. If you are unable to make money of your new venture, you will not have the funds for the repayments, and end up with getting into financial troubles. Think through the resources you need for establishing your business, and make a financial plan. Personal loans should never be used for business purposes, and you could breach the contract terms if you do so. Save up for your start up costs or apply for a startup business loan or grant instead.

3. Paying for Car Insurance

People usually pay for their car or home insurance on a monthly basis, and apply for a finance deal with their company. However, if you want to save on interest, you could pay it on a yearly basis, but only if you can afford it. If you need to avoid finance by applying for  another financial deal, it is not a good idea at all. Personal loan applications leave a mark on your credit file. On the other hand, you don’t want to be paying for this year’s car insurance the following year. Short term finance is offered when you take out an insurance, and you will only pay a few pounds extra a year if you pay monthly.

4. Holidays

Ten Things You Should Not Use a Personal Loan For

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You don’t want to be paying for this year’s holiday next year when you should be booking the new adventure. It is better to save up for your yearly family getaway, or pay a deposit early to secure the best prices. In some cases, you can book your hotel and flights on your credit card without paying a deposit. This way, you can cancel any time, and have enough time to save up for spending money and budget all your expenses. As personal loan terms range between 1 and 12 years, you could be building up credit just because you don’t save up for your cruise or summer holiday on time. That means your hotels and flights will be much more expensive, due to paying interest.

5. Weddings

In case you are serious about starting a life together, you don’t want to begin your new chapter deep in debt. Ask your family members to help you out, or lend you money that you will pay back after the wedding, and don’t splash out. Once you get your own place, you will need to spend on your furniture, a new car, and everything else, therefore, if you stretch your budget too far before you start your life together, you will end up paying for your mistake for many years to come. Getting in debt over a wedding is never a good start for a relationship.

6.To Help Family Members Out

Never ruin your own credit rating to help out other people. No matter how sorry you feel for your siblings or relatives, you should make it clear that you have your own commitments, and they need to take responsibility for their own lives. Even if they pay you the money back, you can reduce your chances of getting accepted for a loan or mortgage because of the credit search on your name. It is never a good idea to mix family and money, and you might end up falling out with your family if you are trying to be too helpful. Keep your finances in order and stay in control of your financial future. Read more about personal loan deals and mistakes before you make up your mind.

7. To Finance Your Lifestyle

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Sometimes, to take control of your financial future, you need to make sacrifices. If you want to keep up appearances and impress your friends and family members in finance, you can end up in trouble a few years down the line. Make sure that you limit your luxury spending and don’t stretch too far. If you cannot afford your golf club membership this year out of your salary, don’t take out a loan, simply cut back. Find other ways of funding your lifestyle, such as taking on another job, getting a pay rise, or changing your job. Paying for your monthly outgoings from your personal loan is a bad idea, and can make your hobbies extremely expensive.

8. Anything that Loses Its Value Fast

Not many people can afford to pay for their brand new car in cash at the dealership. However, if you keep on taking out a loan to change your car every few years, you will end up losing money over and over. If you opt for a brand new car, because it smells and looks great, you need to consider that you are not only losing the value of your investment as soon as you drive it out if the salon, but also every time you pay the interest on your hire purchase or personal loan. Try to save up for as much deposit as possible, trade in your old car, and  choose an ex display model to reduce the rate of amortisation.

9. Further Education

Today, many of us dream about starting a new career, and gaining a new qualification. If you need to go back to college or university to improve your skills and knowledge, try to save up for the tuition fee instead of taking a chance with a loan. Unless you have a guaranteed job after you finish, you should not apply for a personal loan, and find alternative solutions. Look for a company that is ready to finance your course, or apply for funding. This way, you can enjoy your higher income after you finish, without having to worry about paying back tens of thousands of pounds before you get a job in your new industry.

10. Planned and Unexpected Expenses

If you don’t have a rainy day fund, your unexpected bills might cost you more than you would think. To avoid paying high interest rates on short term loans, you need to start saving today. In case you know that you would like to visit your dream destination on your 10th anniversary or your special birthday, it is always better to start saving early than trying to find a finance deal at the time when you need to make the booking. Unexpected expenses and planned large purchases, such as home improvements and a new car should be included in your yearly budget. This way, life’s little luxuries will not cost you an arm and a leg.


There are good and bad uses of personal loans. You can take one out to cover expenses that you couldn’t fund from your monthly budget, but never use them for funding your lifestyle and making everyday purchases. It is important that you regularly look through your budget and make sure you have a rainy day fund and saving account that helps you through financial difficulties. This way, you can save money on interest, and avoid ruining your credit rating, making multiple applications for finance each year. Never take out a loan for investments that can be risky, such as helping out family members, starting a business, or changing your career. Think ahead and make sure you know exactly how much extra interest you are paying for the things you are purchasing with a personal loan.



About the Author

- Young Entrepreneur & Daydreamer. Working towards making the HatchByte group among the top online media publication in India.

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