Home Finance Five Scenarios Where You Must Avoid Taking Personal Loans

Five Scenarios Where You Must Avoid Taking Personal Loans

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At one point in time or the other you will be offered a personal loan, either by your bank or another financial house. Such offers tend to be very attractive, particularly when you consider the ease of disbursement and the fact that you do not need collateral to access it. These loans are excellent at meeting emergency financial needs or for personal reasons. However, if you are considering taking such loan, it is important that you know what things it entails.

These loans should only be taken when you are in urgent need of money and only if the amount you need is not too big and your monthly budget can easily fit in the added expense. Although there may be situations where you have no option but to avail yourself a personal loan, there are certain instances where such loans should be completely avoided, particularly considering their high-interest rate and high repayment. Below is a list of situations where you must avoid taking a personal loan;

Do not take loan on behalf of others:

It is common for people to want to act nice and decide to take personal loans on behalf of their close friends when such people are not eligible themselves. This is an unwise thing to do. If lenders are not willing to give them loans then this should spell out something for you.

Do not substitute it for regular savings:

It is not uncommon for people to ignore the short term nature and the cost associated with personal loans. In many cases repaying them on time becomes a burden. Personal loans should not be regarded as a substitute for savings. It should be restricted to emergency use as much as possible.

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Do not choose unsecured loans when secured loans are available:

Do not go for an unsecured personal loan for a specific purpose when you can opt for a secured loan. For example, it is better you opt for a home-improvement loan when you are renovating your home and a car loan when you want to buy a car. These secured loans have lower interest rate compared to personal loans.

Do not take loan for speculative investment:

it is unwise for you to take personal loans to invest in stock market or in any speculative investment. This is gambling and you might end up losing all the money invested. Never rely on any get rich quick method or strategy. Success in business takes planning, dedication, and patience.

Do not take loan to start a business:

A personal loan mandates that you make regular weekly or monthly repayments. But when it comes to business, there are too many uncertainties when it comes to cash inflows. If you are not able to match your business income with your repayment schedule, then you may end up in a severe debt trap. If you have an ambition of starting and growing a business, then you should source for funds through investment routes like mutual funds, investors, business angels, personal savings or from family and friends.

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