The Best And Worst Ways To Use a Personal Loan

While personal loans seem like a very straightforward product, there are actually good and bad ways to utilize them. Learn more about how you can best make use of personal loans when trying to achieve your financial goals.

ValueChampion Editorial Team

by ValueChampion Editorial Team on Apr 23, 2024


Personal loans, which are unsecured installment loans, are becoming increasingly popular because of their relatively low interest rates compared to other borrowing alternatives like pawnshops or moneylenders.

While personal loans can be used for almost any purpose, some use cases are more financially sound than others. Importantly, taking out a personal loan should lead to either an immediate or a long-term economic benefit. Here’s a look at when taking out a personal loan makes sense and, just as importantly, when it doesn’t.

Related: Advantages of Personal Loans in Singapore

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Consolidating or Paying Off Debt

Consolidating or paying off high interest debt like credit card bills is not only the most common reason people turn to personal loans, but also one one of the smartest.

A personal loan allows you to streamline multiple debt obligations into a single monthly payment with a lower interest rate than you would otherwise have to pay. Many credit cards, for instance, have APRs of 25% or higher. In contrast, debt consolidation plans (a specific branch of personal loans) can have rates as low as 5% to 6%. By dramatically reducing your interest burden, a personal loan can have an immediate economic benefit to your daily finances.

Related: What’s a Debt Consolidation Plan and Who Needs It?

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Home Improvement

Using a loan to make a long-term investment qualifies as “good debt,” as long as the said investment can yield in an oversized return. For this to work properly, you need earn more than you are borrowing in the long run.

Renovating your home, for example, can be a very effective way of increasing the value of your home. In this case, you can utilise a type of personal loan called a renovation loan to finance your home refurbishing project. If you need to spend S$50,000 on your renovation but you only have S$20,000 of extra cash, you could take out a renovation loan of S$30,000 at just 3% to 4%. As long as your home’s value increases by more than S$50,000, this project could definitely be worth taking out such a cheap loan that can cost you as little as a few hundred dollars in interest.

Related: Benefits of Green Loans and How To Apply For Them

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Career or Educational Development

Like borrowing to renovate, using a loan to invest in your career or education could reap dividends down the road by raising your qualifications and boosting your income. For instance, ValueChampion’s study found that post-secondary education can result in income that’s almost 2x higher than it is for people without a post-secondary education. To help you finance your university education, most of the banks in Singapore offer very attractive rates on their study loans. Not only that, even personal loans can be used for other educational or professional-development endeavours like programming bootcamps. If such endeavours can get you jobs (especially high paying jobs), the cost of a few hundred to thousand dollars in interest could be well worth the pain.

Related: Should You Take Out An Education Loan or Personal Loan For Your Higher Studies?

When Should You NOT Use a Personal Loan?

While a personal loan can be used for virtually any purpose, there are instances where a personal loan isn’t the best financing option. Mostly, these are use cases that do not generate any economic benefit to the borrower. Here are a few of those:

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Weddings, Honeymoons or Vacations

Taking on debt for these, or almost any other consumer products or expenditures, is generally a bad idea. Not only will you be stuck paying for your vacation or wedding for years to come, but this strategy also encourages bad financial habits. It is much wiser to save for such expenses than to borrow for them. Most financial experts agree that if you probably can’t afford loans if you must borrow to pay for your wedding in the first place. If you must borrow to finance your dream wedding or honeymoon, keep it to a minimum and consider reducing your budget down a notch.

Related: A Step-by-Step Guide to Financing Your Wedding

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Medical Bills

Faced with a hefty medical bill, a personal loan may seem like a godsend. However, there are several reasons to pause before even considering such a loan. The first is that you can usually work out a payment plan directly with your medical provider, thus allowing you to skip paying interest on the debt all together. Further, medical bills sometimes evolve downward as all-too-common errors are found and some bills can even be negotiated. If you take out a personal loan only to find you owe less, you’ll be stuck paying interest on the extra amount.

Instead, the financially smarter thing to do ahead of time is ensure that you have adequate health insurance coverage. This can prevent you from being in a situation whereby you have medical bills you cant afford to pay in the first place.

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Car Purchase or Refinancing

A personal loan can be used to buy or refinance a car, but it isn’t an ideal option. You’re better off getting a traditional auto-purchase or auto-refinancing loan. Because these loans are secured by collateral, your car, they have lower interest rates than personal loans, which are unsecured. Even just a small percentage difference can result in huge savings when you purchasing something as expensive as a car in Singapore.

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Personal loans are a great form of consumer credit to add to your arsenal when you know the right times to utilise it. If you are interested in learning more about personal loans. Check out our dedicated personal loans page for more resources.

Learn More About Personal LoansFind Out More

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