What Should You Not Use a Loan To Purchase? Quick Guide

Personal loans can be a tempting way to cover expenses, but some purchases may not actually be worth it to finance . Some of those instances include splurges, like a luxury vacation, designer goods or even a lavish wedding.

Here are some guidelines on when you may want to avoid using a loan to pay for certain items or experiences.

MoneyLion

People think it’s rude to talk about money. Should they?

Yes, it makes people uncomfortableNo, talking about money can build better habitsYes, save that chat for a financial advisorYes, people will judge you

98

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

When Is It Smart vs. Risky To Use a Personal Loan?

A personal loan works best when it saves you money or solves a real problem. For example, using a personal loan to pay off credit cards, cover an emergency repair or pay for a necessary medical bill can all be solid reasons to borrow.

The trouble starts when you use a loan to pay for something that loses value fast, that you could save up for or for something that signals a deeper budget problem. These can be cases where borrowing usually costs you more than it’s worth.

Remember that many personal loans can be used for a wide range of different things. But just because a lender allows you to use a personal loan for a wedding, vacation or even to upgrade to the new iPhone doesn't necessarily mean you should.

Smart Personal Loan Uses

• Use of medical bills → Urgent, unavoidable expenses

• Car repairs → Need a car for transportation

• Home improvements → For essential needs like plumbing, heating or cooling

• High-interest debt consolidation → Save money in the long run by lowering interest rates

Do Not Use a Personal Loan For

• A depreciating luxury asset → Value will drop before you can pay the principal

• Crypto investing or other risky investment → Risk outweighs debt

• Lavish wedding or a luxury dream vacation → You’ll be paying high-interest debt for years

• Down payment for another loan → You’ll continue to be in the debt cycle

Good To Know: If you’re planning to buy a home, know that most personal loans are usually not accepted for down payments.

What Happens if You Misuse a Personal Loan?

Misusing a personal loan can lead to serious consequences. Here’s what can happen if you fall behind on payments:

0 to 30 days: Late Payment

You miss a payment, but your account isn’t severely overdue. You could be charged a late fee.

30 to 90 days: Delinquency

A missed payment at this point can be reported to credit bureaus. It could start to impact your credit score.

90 to 180 days: Default

If you fail to pay the loan as agreed, your account may be sent to collections.

180+ days: Collections

Your loan is charged off and sent to a third-party collector. This causes permanent damage to your credit report.

How Do You Decide If a Purchase Is Loan-Worthy?

Here’s a quick checklist to see if a purchase is worth it:

• Is it a need and not a want?

• Will it outlast the loan term?

• Can you afford the monthly true cost?

• Does it increase in value or net worth?

• Is there a cheaper alternative?

• Will there be a return on your investment?

5 Better Alternatives to Taking Out a Loan

Personal loans aren't always your best financing tool. Consider these alternatives before taking on the debt.

1. Emergency Savings

• When to choose this: You have a short-term expense and can replenish the fund quickly.

• One key caveat: You don’t want to put too much into your emergency savings. Since the funds may not keep up with inflation.

Building up your emergency savings can help you stay out of debt. Put away one to six months' worth of expenses by opening a high-yield savings account, establishing automatic deposits and banking windfalls.

2. Payment Plans With Service Providers

• When to choose this: You want to avoid taking on new debt, and the plan offers a flexible repayment option.

• One key caveat: Read the agreement carefully, as the provider plan has strict requirements for debt repayment.

If you're having trouble with household bills, try contacting your provider, servicer or lender. Some companies are willing to extend due dates, negotiate lower rates or balances and waive fees for customers experiencing financial hardship.

3. Budget Cuts or Side Gigs

• When to choose this: You can adjust your budget or temporarily increase your income to cover your expenses.

• One key caveat: This approach may not address urgent needs.

Go through all of your expenses and see where you can make cuts. Common expense cutbacks include streaming services, meal delivery and gym memberships.

You can also look for side jobs to help you earn more money.

4. 0% Annual Percentage Rate (APR) Credit Cards

• When to choose this: Choose this option if you can pay off the debt within the period where you aren’t charged interest.

• One key caveat: If you don’t pay off the balance within the 0% interest period, a higher interest rate will kick in.

Some credit cards have introductory offers of 0% APR on purchases or balance transfers. With these cards, you can save more on interest than a personal loan if you can qualify and pay the balance off before the introductory period ends.

After that, the outstanding balance accrues the go-to variable APR, which is often higher than the APR on personal loans.

5. Debt Relief Services

• When to choose this: You’re struggling with monthly payments and cannot keep up because of financial hardship.

• One key caveat: Debt relief can significantly hurt your credit.

Debt relief services involve negotiating with creditors to lower principal balances due on debt.

You could also tap a nonprofit credit counseling agency to set up a debt management plan.

The Bottom Line

A personal loan is a useful tool when it funds the right things, like consolidating high-interest debt or covering an urgent repair. For example, a personal loan to buy a car can be a smart idea if you need that car to get to work. But a loan can be a poor choice for everyday bills, big splurges, down payments or investments, where the interest costs can outweigh the benefit.

Before you borrow, ask whether the purchase is worth paying off over months or years. If the answer is no, it’s worth exploring other options first.

Key Terms

• Personal loan: An unsecured installment loan from a bank, credit union or online lender that you repay in fixed monthly payments over a set term.

• Delinquency: The period when a loan payment is overdue but the account hasn't yet entered default. Lenders typically report delinquency to credit bureaus once a payment is 30 days past due.

• Annual percentage rate (APR): The yearly cost of borrowing expressed as a percentage, including both the interest rate and certain lender fees. It's a more accurate measure of a loan's total cost than the interest rate alone.

• Origination fee: A one-time upfront charge, typically 1% to 10% of the loan amount, that a lender deducts from your funds before disbursement. It reduces the money you actually receive while you still owe the full loan amount.

• Prepayment penalty: A fee some lenders charge if you pay off a loan before the scheduled end of the term. Not all lenders include one, so check your agreement before signing.

• Debt consolidation: Combining two or more existing debts into a single new loan with one monthly payment, ideally at a lower interest rate, to simplify repayment and reduce overall interest costs.

Sources

• Consumer Financial Protection Bureau: What is a personal installment loan?

• FTC: How To Get Out of Debt

Jeanine Skowronski contributed to the reporting for this article.

Jasmin Baron, CCC™, contributed to editing this article.

Photo credit: LSOphoto / iStock.com

Parts of this article were created with AI assistance. MoneyLion editors reviewed, fact-checked and edited the final version and are responsible for its accuracy.