For people who have never loaned money before, taking out a personal bank loan can be an intimidating experience.
But they can also be a really helpful way to access additional cash when you need it, so long as you have these two things:
- A clear plan of how you’re going to afford to make the repayments
- A genuine need for the money that you’re going to borrow
We sometimes see questions from people who are unsure about the second point. If you aren’t experienced with bank loans, you might not know what they can help you to finance.
Essentially, you can use a personal loan for almost anything that you need or want, so long as it’s legal.
However, that doesn’t mean that it’s always a good idea. Generally speaking, a personal loan can be used to spread the cost of a larger purchase or consolidating other smaller debts. Here are some of the common, recommended uses for personal loans:
- Buying a new car, or other type of vehicle.
- Paying off existing debts – and grouping your debt repayments in a more manageable way. There are also debt consolidation loans designed specifically for this purpose, which may be more suitable.
- Repairing or renovating your home, or buying new appliances.
- Taking a holiday – although you should give it careful consideration before taking a loan for a non-essential purchase such as this.
- Paying for a wedding.
In some circumstances, you can also use a personal loan to fund business costs. Make sure you check all the Ts and Cs before going ahead with a loan for this purpose, as it’s not always allowed, and you may need to take out a business loan instead.
However, there are a few things that you shouldn’t use a personal loan for.
Aside from general rules such as not using loans to fund general lifestyle costs, there are a few no-go areas that you need to be aware of:
- Gambling. Using a personal loan for gambling could potentially cause a lot of problems. Since there is no guarantee that you will make money, or even get your original bet back, it is considered too irresponsible for lenders to give out money for gambling. Losing the money could leave you with no ability to make the repayments that are owed.
- Taking out a loan for another person. While you are technically allowed to give the money you borrow to someone else to use, you would still be on the hook for repayments.
- Putting a deposit on a house. Mortgage lenders are extremely unlikely to lend to you when you tell them that your deposit is being funded through a personal loan.
Of course, as we said at the start, the other reason for avoiding a personal loan is not knowing how you’re going to make repayments. You should have a clear plan in place, one that covers you even if your circumstances change. So long as you have that, and you follow our guidelines, you shouldn’t go far wrong.
Pros & Cons of Personal Loans
Personal loans can be a good way of borrowing money if managed responsibly and you know you can pay off the loan.
If you have reasonably good credit history you can get personal loan at a good rate at the moment due to the low base-rate.
If you get into difficulty paying off a loan you could default on the loan payments, damage your credit rating and get into debt.
Depending on how much you want to borrow and for how long, there may be better ways of borrowing money, such as an overdraft or a credit card with an introductory deal.