Is taking out a personal loan to fund your trip to Greece worth it?
- Personal loans are considered bad debt as they are often used to fund things that have no value or will decrease in value over time.
- Consolidating debt, covering unexpected expenses, or financing value-adding home renovations are good reasons to take out a personal loan.
- Buying fancy dinners or funding a holiday may be better paid for with savings or other suitable financing options.
Personal loans are often used to fund things like travel, weddings, or cars – things that fund your lifestyle or have no value or will decrease in value over time. Unlike home loans, which are generally seen as good debt, personal loans are often considered bad debt.
However, it doesn’t mean you absolutely never take out a personal loan. There are some instances where a personal loan can be useful.
The key is to make sure you can comfortably afford the repayments and that you’re taking out a personal loan for a good reason. Sorry to burst your bubble, but there are better ways to finance that trip to Greece!
Read also: Good debt vs bad debt
When to take out a personal loan
You want to consolidate debt
Taking out a personal loan can make sense if you’re drowning in multiple debts and want to consolidate them into a single loan with a single monthly repayment.
For example, let's say you have:
- A $10,000 credit card debt with a 20% interest rate,
- $7,000 outstanding on a personal loan with a 10% interest rate, and
- A $3,000 personal loan at a 7% interest rate.
In this situation, you may be able to consolidate them all into a $20,000 personal loan with a 10% interest rate and pay down all your debts at the same time with one monthly repayment and interest only accruing on one loan – not three.
You’re covering an unexpected bill
In an ideal world, you’d already have an emergency fund set up to cover any unexpected bills. But if you don’t, taking out a personal loan when you’ve been stung with an emergency $6,000 dental bill or your washing machine unexpectedly breaks and floods your apartment, makes sense because the main concern here is quick and easy access to cash.
You want to finance a value-adding renovation
A personal loan can help fund smaller renovations, as most personal loans have a borrowing limit of $50,000 and a lower interest rate than a credit card.
Besides a personal loan, however, there are other ways you can finance a renovation, including through your savings, by using the equity in your home, or via a construction loan.
In the market for a personal loan? The table below features personal loans with some of the lowest interest rates on the market.
| Lender | Car Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Interest Type | Secured Type | Early Exit Fee | Ongoing Fee | Upfront Fee | Total Repayment | Early Repayment | Instant Approval | Online Application | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.24% p.a. | 6.95% p.a. | $389 | Variable | Unsecured | $0 | $10 | $495 | $23,334 | |||||||||||
5.95% p.a. | 5.95% p.a. | $386 | Fixed | Unsecured | $0 | $0 | $0 | $23,171 | |||||||||||
5.76% p.a. | 5.76% p.a. | $384 | Fixed | Unsecured | $0 | $0 | $275 | $23,066 |
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When you shouldn’t take out a personal loan
You’re taking out unnecessary debt
If the cost of the personal loan outweighs any benefits, you probably shouldn’t take one out. Some of the reasons you may want to reconsider applying for a personal loan include:
- Funding a holiday
- Paying for fancy dinners
- Shopping for clothes you don’t really need
- Buying the latest smartphone while your current one is still in good condition
While you might try to argue that the benefits outweigh the costs, i.e., you’re paying for a once-in-a-lifetime experience with that overseas trip, that personal loan could end up being more expensive than the holiday actually costs when we include the interest and fees.
- Quick tip: When it comes to something like a holiday, unless you already have the money (you’ve saved up for it), it’s best not to take out a personal loan.
You’re not confident you’ll be able to repay the loan
You should only ever borrow money if you’re confident you can afford the loan repayments.
Keep in mind that missing your monthly repayments and/or defaulting on your loan can negatively impact your credit score, which could make it harder for you to take out another loan in the future.
You could get a better deal with an alternative financing option
If you really need fast access to cash, a personal loan isn’t the only option. Depending on your reasons for needing the money, other options exist, including a line of credit loan (for home renovations).
Before applying for a personal loan, compare your options to see if there’s a better alternative out there.
Alternatives to a personal loan
Savings
For discretionary purchases like travel, spending money saved for a specific purpose would be the ideal way to go.
You don’t have to make any repayments or owe interest, and you will likely appreciate the holiday (or whatever you bought) more because you know how hard you’ve worked to save up for it.
Consider parking your holiday fund, wedding fund, phone fund, or any short-term savings goal in a high-interest savings account to take advantage of interest earnings.
See also: Personal loans for holidays
Line of credit loan
If you’ve got a home loan, a line of credit loan could be a suitable alternative to taking out a personal loan.
A line of credit loan essentially acts as a ‘credit card for your house’ that allows you to access the equity you’ve built up in your property. You can withdraw up to a certain amount, determined by your lender.
The interest on line of credit loans is only charged on the amount drawn. For example, if you’ve been approved for a line of credit loan of $50,000 and only accessed $30,000, you’d only be charged interest on that $30,000, not the entire $50,000. This makes line of credit loans more flexible than personal loans.
Credit cards
Credit cards can be useful in providing credit for short-term expenses as they offer a more flexible repayment structure than personal loans.
With credit cards, you only pay off the balance (purchases + interest and fees, if applicable). Assuming you fully pay off your credit card balance within every interest-free period (usually up to 55 days or so), then you can end up paying $0 in interest.
Note, however, that credit cards do generally have higher interest rates and fees than most personal loans. So compare your options and read more about personal loans vs credit cards.
Pros and cons of personal loans
Pros
- Typically have lower interest rates than credit cards (particularly for borrowers with good credit)
- Finance a variety of purposes (travel, wedding, renovations, car, debt consolidation, etc.)
- Fast access to cash (some lenders offer fast, sometimes same-day approval and funding)
Cons
- Higher interest rates for borrowers with bad credit
- Fees and charges (upfront fees, ongoing fees, and break costs if fixed)
- Risk of being in long-term debt
Savings.com.au’s two cents
There are times when taking out a personal loan could make sense, like if you’re trying to consolidate debt, or you don’t have emergency savings and need to cover an unexpected bill ASAP.
However, if you’re taking out a personal loan for discretionary purchases, you should reconsider whether it’s worth going into debt for, or if you could exercise a bit of discipline and patience and save up instead. Get comfortable with delayed gratification, make a savings plan and work hard towards that goal.
To get started, we’ve got plenty of guides on how to budget and save money, even if you’re bad at saving.