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A consumer loan gives you the flexibility and opportunity to spend the money as you see fit. Unlike credit cards, these loans are usually supplied with lower interest rates and longer down payments.
Here we take a closer look at when it’s appropriate to use a consumer loan, and vice versawhen it isn’t.
When might a consumer loan be the right form of financing?
An unsecured loan means that the borrower is not required to submit collateral for the loan. Still, lenders have other ways to get their money back, so this should not be misinterpreted.
Such loans are better for individuals with stable finances. In other words; People with stable incomes and low to moderate levels of household debt.
With a good credit score, you will also be rewarded with lower interest rates. This is because from the point of view of banks, the risk of default is less.
Unsecured loans are also prudent in cases where there are no real ways to secure the loan. For example, you would never finance your home this way (that’s why we have mortgages), but you may want to use it for other purchases that can’t be secured.
Loans without collateral should also be used for financing goods of long-lasting value. For example, to build a shed where you can work on your hobby or a lawn mower that will last for many years.
What should it not be used for?
Here is a short list, along with some items that should not be financed with unsecured loans:
1. Fixed monthly cost: Unless we’re talking about a one-time exception (say the washing machine broke down), you should never use it to cover your fixed monthly costs.
If you cannot afford to pay these expenses on a monthly basis, it is an indicator that your household budget is under severe pressure. Borrowing money to pay bills will only add to the financial crunch in your household.
2. Down payment on a mortgage: You should never meet your down payment requirements with anything other than your savings. There are many reasons for this, but the most important one is the financial risk you are taking.
Should interest rates rise (or if you lose your income), you’ll have serious problems covering your monthly mortgage bills. An unsecured loan will only add stress to the situation.
Also, let’s not forget why banks have to ask for a down payment in the first place. This is because you have fewer financial opportunities when you sign for a mortgage.
3. Interest on other loans: This may sound obvious, but it should not be overlooked. Never use a consumer loan to pay interest on other loans. You’re just making the problem worse, adding fuel to the fire.
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