Reasons To Get A Personal Loan And Whether It’s A Good Idea

May 19, 2021

Personal loans are designed to be flexible. As a result, one of the best things about applying for a personal loan is that you can use it for pretty much anything. Whether that’s heading off on the trip of a lifetime or creating value within your home by doing some much-needed upgrades, a personal loan can cover all that, and more.

But, just because you can take out a personal loan, doesn’t always mean you should. Personal loans come at a cost. So, whatever you borrow now, you will need to pay back, alongside fees and interest. With that in mind, the question to ask yourself is, is applying for that personal loan worth it?

In this post, we’ll look at the various reasons why you may want to apply for a personal loan, to then delve deeper into the pros and cons behind that decision. To help you decide whether applying for a personal loan is the right choice for you, we’ll also cover some alternatives you may want to consider before committing yourself to the loan.

Travel

While international travel has remained largely off the cards since COVID hit, that hasn’t stopped Aussies from getting out and exploring within Australia’s borders. Now, with the new Australia-New Zealand travel bubble in place – and the promise of further bubbles opening up – many keen adventurers are making plans for their next big trip.

If you feel like you’re due a getaway, one of the biggest factors you will need to take into account is cost. If you cannot drive there, you will need to cover the cost of flights, or perhaps train fares. Then there’s accommodation, food, drink, activities, and all the rest. And, unlike travel to Bali or Fiji, where you can easily holiday on a shoestring budget, the cost of living while travelling in Australia or New Zealand is far from insignificant.

Got savings set aside for travel? Great, you can use them to cover all those costs. On the other hand, if your holiday fund is looking a little puny, you may need to look into other options. For some, that will mean taking out a personal loan. But, is a travel loan the right option for you?

Why choose a travel loan?

A travel loan is essentially a personal loan you use to cover the cost of travel. Again, back to that concept of flexibility – you can use most personal loans to cover most of anything, so pretty much any personal loan you choose can become a travel loan if you so wish. Here are some reasons why you may want to choose a personal loan for travel.

  • You want to book now, not later. After you’ve been approved for a personal loan, you can start booking. The funds are there, in your account, which means you can snap up everything from flights to accommodation, allowing you to get the best price, without worrying about dwindling availability.
  • You want to choose how much of the trip you’d like to cover. Only need to pay for flights? Perhaps you only want to book accommodation or a campervan? Whether you need a loan to cover a small part of your trip, or the whole thing, you can get your hands on the funds you need, when you need them.
  • You want to spread the cost of your trip. If you don’t have the funds available to pay for your planned holiday, a personal loan could make the costs more manageable. You can borrow what you need, to then pay it back over a period that suits you. If you choose a fixed rate loan, you will know exactly how much you will pay back, making budgeting that much easier.
  • Your trip is last-minute. Whether you’re jetting off on a last-minute getaway, or you’re travelling to take care of an emergency, a personal loan can cover the cost of your travel arrangements if you don’t have the money available to cover it. Some personal loans offer same day access to funds, with easy online application and approvals, making it easy to get your hands on the money you need now.

What should you consider?

Of course, there are other factors to consider as well. Here are some things worth thinking about before you apply for a personal loan for travel.

  • You are increasing the cost of your trip. As you are borrowing money to pay for your holiday, you will pay out in fees and interest as you repay what you owe. If you opt for a ‘fast cash’ loan from a less than credible lender, or if your credit isn’t that great, your interest costs will be significant. Fees can also mount up, especially if you miss repayments.
  • You will have to tighten your budget as you repay the loan. If you struggled to save money in the lead up to your trip, that may mean you’ll struggle to make your repayments as you repay the loan. Unless you can find room in your budget for those repayments, a personal loan may not be the best idea.
  • You will need to have good credit to apply. To get approved for a personal loan, you will need to have good credit and the means to repay what you owe. If you have bad credit, or your income is unsteady, you may find it difficult to get approved.
  • You may be paying the loan off long after your trip ends. While there’s no denying holidays can be fun, it’s worth thinking about whether you want to be paying for those two weeks in the sun for another two years after you come home.

Are there any alternative options?

If you decide that a personal loan is not the best option for you, are there any alternatives?

  • Take time to build up your holiday fund. While it may delay your trip, taking time to build up your savings could lower the cost of travelling, by removing the cost of fees and interest added to a personal loan.
  • Travel smaller. By travelling on a budget, by staying closer to home, or by reducing the amount of time you’re away, you could spend less on your holiday. This could make the cost of your trip more manageable and easier to save for.
  • Use your rewards. If you’ve built up a healthy balance on your rewards credit card, you could use those points to reduce the amount you have to spend on your trip. Keep an eye out for any special offers or exclusive deals that allow you to get more from your points when you book.
  • Utilise a 0% purchase offer. If you have good credit, you may choose to apply for a credit card with a 0% purchase offer. You can then use the card to cover the cost of your trip, and pay off your spending within the intro period with no interest. Take care with this option, as it could land you in trouble if you overspend or fail to repay what you owe within that intro period.

Vehicle

This time last year, we found ourselves in lockdown, not knowing what would happen next. Jobs were cut, budgets were tightened, and the future of the economy looked pretty bleak. With that kind of uncertainty, it’s really no surprise new vehicle sales plunged. Who wants to buy a new car when they don’t know if they’ll have a job tomorrow?

But, as new data reveals, things seem to be turning around within the new vehicle industry. According to the Federal Chamber of Automotive Industries (FCAI), new vehicle sales in March 2021 were up 22% compared to the same period last year, giving the sector its strongest March result in two years. In particular, SUVs saw the greatest growth in sales, increasing 32%, while light commercial vehicles, including vans and utes, jumped up by 28%.

One reason for the surging growth in this category of vehicle could be our increased holidaying at home. Quite simply, we need vehicles that will allow us to explore this incredible country of ours. This idea is backed up by new data released by buy now pay later platform Zip Co, which revealed caravan spending was up 179% during January to March 2021, compared to the same period last year.

If you’re thinking of investing in a vehicle – whether that’s a new or used car, a caravan, boat or motorbike – a personal loan could make that happen.

Why choose a car loan?

So, why would you want a car loan? Car loans come in all shapes and sizes. First up, there are car loans, which are designed specifically to finance cars. Then there are caravan loans, boat loans and motorbike loans, which are also designed to suit a specific purpose. And of course, there are general purpose personal loans, which can be used to fund almost anything, including the purchase of a vehicle.

The type of loan you choose will depend on the type of vehicle you are looking to finance – and how you want to pay it back. With that in mind, here are some reasons why you may want to choose a car loan or a personal loan to buy a car.

  • You don’t have enough to cover the cost upfront. The main reason you would apply for a car loan would be to cover the cost of a vehicle you want to buy, but can’t afford to pay for upfront. With a car loan, you can spread the cost over a number of years, making that large expense much more manageable.
  • You want to secure your loan to enjoy lower rates. With a car loan, you can secure the vehicle you buy against the loan. Doing this, you can benefit from lower rates, making the loan more affordable. Secured loans can also be easier to get approved for, as the collateral on the loan lowers the risk for the lender.
  • You want to invest in a ‘toy’. Want to travel Australia? You’ll likely need a vehicle to get around in. Want a new toy to pass the time? A personal loan could help you cover the cost of a caravan to explore the country, or perhaps a boat, motorbike, jet ski, or anything other type of toy you want to invest in.
  • You’re buying an eco-friendly car. Buying an electric car or hybrid? You could apply for a green car loan to benefit from lower rates and fees as a reward for going green. Check out our post on green loans to find out more about this type of loan.

What should you consider?

Ready to hit the open road? Before you apply, here are some factors worth considering.

  • You will pay fees and interest on the loan. As with any personal loan, you will pay out fees and interest, which obviously increases the cost of buying the vehicle. For most people, however, fees and interest are something you just have to deal with if you want to buy a car. A car is a large expense, which most cannot cover upfront.

TIP: You can reduce interest costs on your car loan by putting down a deposit – and by shopping around to get the best rates. Creditworld can help with this.

  • If you fail to repay your secured loan, you may lose your vehicle. While securing your loan can offer benefits such as lower interest costs, it is worth bearing in mind that if you fail to repay what you owe, you risk losing the asset used to secure the loan. For this reason, it’s important to only borrow what you know you can pay back.

Are there any alternative options?

The only real alternative to financing a car with a car loan is to save up and cover the cost of the vehicle upfront. While some car buyers may consider buying a car with a credit card, perhaps to benefit from rewards points, this is only a good idea if the entire cost of the car can be repaid before the balance starts accruing interest.

Home Renovations

Over the past year, we spent a lot more time at home. Whether we were working from home, home schooling, or simply entertaining ourselves at home because our usual entertainment options were locked down, we all saw a lot more of our own four walls than we usually would.

And, whether it was out of boredom, or because we had more opportunity to inspect our home’s flaws, it seems many of us turned to home renovations to pass the time.

In the US, a recent survey found that of those Americans who applied for a personal loan in the past year, 25% said they used the funds for home improvement projects. Indeed, home renovations was the most common reason for applying for a loan. Here in Australia, it was a similar story, with Bunnings queues running around the block, packed with eager DIY-ers.

Why choose a loan for home renovations?

There are plenty of reasons to improve your home, but for the most part, renovation projects don’t come cheap. Here are some reasons why you may choose to apply for a personal loan to fund your DIY dreams.

  • You want to build value in your home. The right upgrades can help you build value in your home, offering value to you as you make use of them day-to-day, while also building value for the future. Perhaps that means revamping your yard by installing a deck, bringing your kitchen into the twenty-first century, or simply giving the interiors a lick of paint. Whatever your plans, a personal loan could help cover the cost, so you can start enjoying those upgrades sooner.
  • You’re thinking of selling. The property market is hot right now. If you want to make the most of it by selling, you may want to do that sooner rather than later. But, if your home is not yet buyer-ready, a personal loan could help you do those much-needed upgrades, to get your house on the market faster.
  • You want to make your home more comfortable. Considering opening up your living space by knocking down a few walls? Perhaps you want to add a soaking tub to create a sanctuary within your bathroom? Whatever you want to do to your home to make it more comfortable, you could get started quicker with funds from a personal loan.
  • You want to invest in green upgrades. If you’re going green at home – installing solar panels, getting a rainwater tank, or upgrading to eco-friendly appliances, for example – you could fund the project with a green loan to benefit from lower rates and fees.

What should you consider?

Want to jump on the home reno bandwagon? Before you do, here are some aspects of applying for a loan for home reno projects that may be worth considering.

  • Avoid borrowing more ‘just in case’. When you apply for a loan, you need to decide how much you will need to borrow. This can be tricky when you are carrying out renovations, as you never really know what might go wrong. While it’s a good idea to build some wiggle room into your loan, avoid borrowing a lot more than you think you’ll need. Borrowing more means paying more in interest, increasing your repayments, and essentially reducing any value you build in your home.
  • Consider your ability to repay. Back to fees and interest again. When you take out a personal loan for home improvements, you will need to factor fees and interest into your budget. To reduce costs, look for a loan with low rates, to then choose a repayment schedule over the shortest term you can afford.
  • You may be limited by your abilities. If you are planning on DIY-ing it, just be aware of what you can actually achieve. While home reno shows make it look easy – and quick – remember they are professionals. Avoid going beyond your limitations and making a mess that will require the skills of a professional (and perhaps another loan).

Are there any alternative options?

Not sure if a personal loan offers the right route for you? You could consider refinancing your home loan to free up some equity, or opting for a line of credit. With this option, you only pay interest on what you borrow, which can work out well when you’re unsure of your budget. You will need discipline when making your repayments though.

Emergencies

Hot water tank exploded? Car belching out blue smoke? Whether the dog broke its leg or you need a root canal, emergencies such as these can be expensive. Unless you have money squirrelled away, you will need to look into other options to cover the cost. Enter, the personal loan.

Why choose a personal loan for emergencies?

Building an emergency fund is hard, especially with so many other costs you have to cover. If your emergency fund isn’t quite up to scratch when an emergency comes your way, a personal loan could help.

  • You can get fast access to funds. Some personal loans allow you to apply online, to then get access to your funds just a few hours later. A loan such as this could help you out when you need it most, to then let you repay what you owe over a period that suits you.
  • You can benefit from lower rates than other ‘emergency’ options. If you choose to put your emergency costs on your credit card, you will have to repay the entire amount quick-smart if you don’t want to get hit with high interest. Similarly, payday loans and other fast cash options also charge high interest rates, greatly increasing the amount you will have to pay back.

What should you consider?

While you may be stressing out about how you’re going to cover the cost of this emergency, it’s worth taking some time to consider what you’re doing before you apply.

  • Is the loan affordable? You will need to make room in your budget to cover the loan’s repayments. If you think you will struggle to cover the repayment each month, you may be better off looking at other options, or spreading the loan over a longer period.
  • Is your credit up to scratch? To get approved for a personal loan, you will need to meet the lender’s eligibility requirements. Not only will you need to show your income will allow you to repay what you owe, you will also need to prove your creditworthiness. If your credit isn’t awesome, you could damage it further by applying and getting rejected.

TIP: Even if you’re worried about your chances of getting approved, avoid applying for multiple loans in the hopes that it will improve your odds. It won’t. In fact, it will likely hinder your approval, as lenders may deem you higher risk for making multiple applications.

Are there any alternative options?

As we mentioned in the previous section, there are other options to fund an emergency. If you don’t have savings set aside, you could opt to pay for the emergency with a credit card, or apply for a payday loan. Both of these options tend to come with high interest costs, and are best avoided unless you can pay back what you borrow before interest kicks in.

Debt Consolidation

While there are many other reasons why you may want to apply for a personal loan, consolidating debt is the last one we’ll look at in this post. When you use a personal loan to consolidate debt, you pay off a number of other debts, essentially rolling them into one loan to make them more manageable.

Why choose a debt consolidation loan?

Okay then, let’s get into the reasons why choosing a personal loan to consolidate debt may work for you.

  • You want to take the stress out of repaying multiple debts. Keeping on top of multiple debts, remembering which one needs to be paid and when can be stressful. By rolling all your debts into one personal loan, you only have one debt to keep on top of, and one repayment date to remember.
  • You want to lower costs. If your debts are currently attracting high interest, you could reduce your interest costs by rolling them into a personal loan with a lower rate. With just one loan, you may also reduce the amount you pay in fees, giving you more to put towards paying down your debt.
  • You want to spread your debts to make them more manageable. With a personal loan, you can pay off your other debts, to then spread the total cost over a longer period. While this may increase your interest costs, you could benefit from a repayment schedule that’s actually manageable.

What should you consider?

Like the sound of paying off all your debts with one debt consolidation loan? Before you apply, here are some important things to think about.

  • Your credit will need to be in good shape. If your credit has suffered as a result of you mismanaging multiple debts, you may find it challenging to get approved for a new loan. Your credit will need to be up to the standards of the lender, and you will also need to prove your ability to cover the cost of the new loan’s repayments.
  • You may pay more in interest. By stretching out your debt over a longer period, you may end up paying more in interest.
  • This will not solve serious financial problems. A debt consolidation loan cannot be used as a Band-Aid for serious financial issues. If you are struggling with your debts now, there’s a chance you may continue to struggle after you have been approved for the new loan. Before applying, seek advice from a professional or call the National Debt Helpline.

Are there any alternative options?

Debt consolidation loan not right for you? If you have credit card debt, a balance transfer card could work for you – but you will need to be disciplined in your repayments to ensure you repay the entire balance within the intro period. You could also work on paying down your debts by adopting a debt repayment method such as the Avalanche method or Snowball method.

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