Are There ‘Bad’ Reasons to Borrow Money?
January 29, 2020 by Daniel Azzoli
A personal loan may be one way to cover an unexpected emergency bill, but does it give you carte blanche to spend it on anything?
Ever think to yourself: why do people get personal loans? It’s a big question that doesn’t have a simple answer. There are a lot of reasons why someone might turn to a personal loan for help.
But are they all created equal?
When it comes to using a short-term loan, for example, there are some smart and not-so smart ways to use this money.
You don’t have to be a financial expert to recognize some ‘bad’ reasons to borrow. Taking out a loan to play the lottery, for instance. Now that is an exceptionally bad idea!
But not all bad ideas are as flagrant as gambling with borrowed money. Many may start out as thinking that they are borrowing personal loans for perfectly valid reasons until the bill arrives and they’re stuck paying off the debt they can’t afford.
You see, even the most generous loan with the best rates and extended terms is still debt. Taking on debt may be a bad idea if you get it for the wrong reasons or if you can’t afford to repay it.
Here at MoneyKey, we know there are valid reasons for personal loans. But today, we’re going to share several cautionary tales.
Here are five situations when borrowing may not be the smartest move for your finances.
Paying Expected or Regular Expenses
“Fixed” is the term that often describes your expected expenses that arrive on a regular schedule. They tend to show up in your budget as things like rent, car payments, and bank fees.
These bills make up the foundation of your budget because they’re predictable. You know when they’re due, and you know how much they’ll cost. A portion of your paycheck should be devoted to these payments.
If you have to borrow cash to pay these fixed expenses, something has gone wrong with your budget. You may be spending too much money on non-essentials, or you might not make enough to keep up with your bills.
In either scenario, your budget may be lopsided; your incoming cash doesn’t cover your out-going cash. In other words, you’re spending beyond your means.
When your budget is off kilter like this, something is bound to give, and it can spell trouble for your finances. Before your budget implodes, try restoring balance to your spending plan by:
- Sacrificing fun expenses that tie up cash meant for your bills
- Making significant changes to your lifestyle to reduce how much you spend in rent and other fixed expenses
- Boosting your income by getting a second job
Do you notice what’s missing from this list? The installment loan is absent for a reason.
Here at MoneyKey, we don’t advise using an installment loan to cover monthly bills. It’s designed to act as a safety net when your savings fall short of unexpected emergency expenses.
Paying off One Installment Loan with Another
Paying back a loan, such as your installment loan on time is an essential component of good money management. It can help you avoid additional interest, late penalties, and potential damage to your credit history.
And, let’s not forget, you’ll free up all the cash usually tied up with your repayments once you’re done!
For these reasons and more, you have every intention of paying your bills back on time. But things happen. If another financial hardship comes along — a medical emergency or an unexpected auto repair — your budget may be stretched to its snapping point.
In this moment, it may seem like the right time to take out an installment loan, but it’s actually one of the worst reasons to borrow money.
Taking out a loan such as an installment loan to pay off another one is only a temporary solution which does nothing to address the underlying problem: your budget isn’t up to snuff.
Tweak Your Budget if You Can’t Pay Your Bills
If you ever find yourself in this situation, go to your budget to see if you can cut excess spending. Look to variable or fun splurges that may be tying up cash you could otherwise put towards your installment loan payments.
Skipping takeout, cancelling monthly subscriptions, and buying generic groceries are good tips. But they can only free up so much cash depending on the budget.
If unexpected unpaid leave or health issues make it hard to cover your installment loan, you may not have enough cash to go around, no matter what you eliminate.
Talk to Your Lender!
If slashing expenses doesn’t help, you’ll want to speak with your lenders before you consider taking out another installment loan.
This conversation may be a hard one to broach, but it is beneficial to ask about any possible alternative payment arrangements when needed.
Either way, you’ll want to rethink your budget. Once you pay off this installment loan, is there a way to set aside cash for emergencies? Well-stocked emergency savings may help you take on financial hardships without the need of a personal loan.
If you’re ready to prepare for a rainy day, check here where 8 questions about money are answered, one of which is how much you need in an emergency fund.
Whatever you do, don’t avoid a bill you can’t pay. Avoidance will only make your anxiety worse and your bills bigger!
Splurging on Unnecessary Expenses
At $699, the new iPhone 11 may seem like a steal compared to its predecessor the iPhone XS — a handset that cost $1,000 at its debut. But is it worth taking out a personal loan to cash in on these savings? Absolutely not.
The hottest smartphone may feel like a burning ‘need’ when in reality it’s just a ‘want’.
As financial wants go, they tend to be things you can live without. They may spark joy in your life, to borrow a phrase from organizational guru Marie Kondo. But they aren’t necessary for your survival.
Financial needs, on the other hand, are things that keep you safe and healthy. They include things like housing costs, healthcare, and groceries.
Understanding the difference between these kinds of financial expenses will help you determine if something is worthy of a loan.
Let’s take a look at the comparison below to see why.
- Upgrading to a new phone is a ‘want’. Putting this goal on hold won’t have an impact on your health or safety, so it’s something you can put off until you have the cash.
- Covering a medical bill is a ‘need’, and it’s something you have to pay whether you can afford it or not. If it’s unexpected and an emergency, a personal loan may be an option.
Why isn’t a Personal Loan an Option?
Here are three no-nonsense reasons to skip the personal loan the next time you want to splurge.
- Cash Constraints: You’ll be devoting future money to your loan payments that include interest and other charges. This uses up a part of your paycheck until you pay it off in full.
- Added Costs: Accrued interest means you’ll be paying more for your unnecessary upgrade than if you bought it out of pocket.
- Value: The shine of your new phone may wear off in a fraction of the time your loan term lasts. You may be paying interest and/or fees for potentially a number of years, while your phone may become old news after a few months.
When it comes to a luxury item like a new phone, it’s generally better to save up the money and make the purchase on your own. The same advice goes for any unnecessary splurge, like unnecessary clothes, kitchen gadgets, or video games.
Financing Special Events
A well-deserved party is a good excuse to let your hair down, but it’s never an excuse to take out a loan such as an installment loan.
Unfortunately, people still do it. The worst culprits? Those preparing to tie the knot.
Let’s face it — getting married is expensive. The average wedding ceremony and reception costs $29,200. But this price balloons to $38,700 once you include the average engagement ring and honeymoon according to WeddingWire’s 2019 Newlywed Report.
This same report reveals roughly half of couples spend more than they planned. Underestimating costs is one of the top reasons why they go over budget. Paying for must-have upgrades, custom elements, and growing guest lists fall close behind.
The result? Twenty-eight percent of couples go in debt from wedding costs.
Going into debt from wedding costs is a bad idea. You may be better off postponing the big day until you have the cash you need for your dream wedding.
Extending your engagement period gives you more time to save. It also gives you ample time to research the best prices on venues, caterers, and entertainment.
If you simply cannot wait, celebrating is possible on any kind of budget as long as you’re willing to compromise during the planning process.
Here are some ideas on how to tie the knot on a tight budget:
- Switch out a costly rental hall for a something for simpler such as a family friend’s backyard
- Cut the guest list for example from 200 people to a smaller group of 50 of your closest friends and family
- Hire a photographer just for the ceremony and leave disposable cameras at each table during the reception
- Skip the open bar and use drink tickets instead
- Forego the reception altogether and plan a party at a later date.
By breaking the mold in any way you might come with serious cash benefits, so don’t be afraid to organize a unique wedding. It’s your day; celebrate it the way you want!
Just be wary of taking out a personal loan to cover these expenses. You already have enough to worry about without adding debt to your new life together.
Going on Vacation
Winter weather can be tough. With Old Man Winter raging outside, many of us hunker down inside and live life through our screens.
While it’s one way to pass the time, checking social media may not help with the winter blues. Between friends bragging online about their vacations and influencers flooding your feed with pics of their professional holiday, you’re stuck at home suffering from wanderlust.
In severe cases, wanderlust may convince you to throw caution to the wind, quit your day job, and fly half-way across the world to become a digital nomad.
But even acute wanderlust may cause you to take leave of your senses if you use a credit card or loan to finance your trip.
According to the 2017 LearnVest Money Habits and Confessions Survey, 74 percent of Americans who took the survey, went into debt to pay for a vacation. Those that did accrued an average of $1,108.
It doesn’t help that the travel industry relies increasingly on credit. In many cases, the only way you can buy airfare, book rental cars, or reserve hotel rooms is with a credit card.
While it may seem perfectly normal to take out loans to afford a holiday in the sun, you shouldn’t.
Charge flights or hotel reservations to your card only if you can afford to pay off these purchases right away.
As a general rule, you shouldn’t apply for a personal loan to jet-set, no matter how badly the wanderlust hits you.
Try staying home instead and act like a tourist in your hometown. In between visiting undiscovered corners of your community, schedule some time to revisit your budget. Find out what you have to change to be able to afford a trip next year.
Be Wary of What Holiday Debt Can Do to Your Credit
Racking up debt you can’t afford on a credit card may have consequences for your credit. Missing payments may add negative marks on your report, which may lower you score.
Roughly 35 percent of FICO consumers have a subprime credit score, but the average American credit score has never been higher at 704! For more facts like these, click here to learn more.
Generally, a low score means you’ll pay more for loans in the future. While there are loans available for consumers with bad credit, they tend to have higher rates than other options.
These ‘Bad’ Reasons to Borrow Money Have One Thing in Common
A loan covering an exotic getaway, designer shoes, or frequent dinner outings. What they all boil down to is this:
You’re spending cash you don’t have on things you don’t need.
If an item, service, or experience falls into this category, holding off on them until you have the cash is a great idea that may come with huge perks.
For one, it gives you a chance to focus on your budget. You may prioritize your expenses to cut out bad spending habits and boost savings.
It can also help you avoid a big bill if you take advantage of the wait. By researching the best prices, discounts, and times to shop, you may end up paying less thanks to the delay.
What Reasons are ‘Good’ for Personal Loans?
While taking on consumer debt for a one-day event or for a piece of clothing may not be ‘good’ reasons to borrow money, there can still be some perfectly valid reasons to borrow personal loans.
But unlike those fun or interesting things you can plan in advance, they tend to be unexpected emergencies.
What would an unexpected emergency look like to you? Maybe your child got sick and you had to miss time at work to look after them, followed by a flat tire on your first day back.
Or maybe it looks like the medical bills, prescriptions, and parking fees that arrive after rushing your child to the walk-in emergency clinic.
If your savings fall short for unexpected emergencies like these ones, an online loan may be an option.
But just like how each financial emergency may look different, the way you handle them may vary too. And an online loan may or may not be the right choice. Get in touch with us to find out what you need to know about online lending before you apply.