It’s no surprise that personal loans can be used for practically anything you want to buy. However, this doesn’t mean you should borrow recklessly just to fulfill every idea or impulse. A personal loan is still a significant financial commitment, and taking on too many loans can quickly lead to a situation where you can no longer manage your debt burden.
Here are some things you should definitely avoid purchasing with a personal loan, even though there are no strict rules against it—no one is explicitly prohibiting you from taking a personal loan for these purposes (and these items can often be purchased through other financing options). However, we believe that these items should never be financed through a personal loan.
1. Jewelry and Gifts
Almost every jewelry store, like Kay Jewelers or Zales, offers financing options for purchasing jewelry. Imagine walking into a jewelry store to buy a ring, watch, or beautiful necklace and deciding to take out a personal loan to pay for it.
This might seem like a good idea since jewelry can hold some value over time. However, consider the other side: a personal loan is a costly, long-term obligation, and the jewelry you purchase won’t likely cover that expense.
Think about this: if you want to buy jewelry worth $1,000 (like a particularly fine necklace) and take out a $1,000 personal loan, the total cost could easily exceed $1,200. For instance, if you take out a personal loan from a lender for a two-year term, you could end up paying back $1,230.22. This means your necklace would need to magically increase in value to at least $1,231 within two years for you to break even.
Even if you buy a pure gold necklace, while gold prices may rise, it’s unlikely that you’ll make enough profit from selling the necklace to cover your loan costs. At best, you might get some of your money back, but probably not as much as you spent on the loan.
Taking a look at gold prices today, two years ago, 10 grams of gold were priced around $630. Today, 10 grams cost about $760. Sure, the price has increased, giving you an extra hundred dollars or so, but if you bought jewelry using a personal loan, you’d still be in the red.
Jewelry is not an investment, and personal loans should never be used to buy gifts—this is almost always a shortcut to debt.
2. Cosmetic Products and Beauty Treatments
Surprisingly, cosmetic products and beauty treatments are common reasons for taking out personal loans. Many people want to look as good, youthful, fit, and attractive as their friends, acquaintances, or colleagues. This “keeping up with the Joneses” mentality can lead to taking out a personal loan just to pay for cosmetic procedures or treatments.
While you can’t put a price on feeling good, and self-confidence might be a valid reason for some expenses, no beauty procedure justifies taking on debt. Another problem with beauty treatments is that they often require multiple, regular sessions. A personal loan, on the other hand, is a one-time deal with ongoing monthly payments. Are you really willing to keep making personal loan payments a year or two after your beauty treatment has faded?
The only acceptable reason for taking a personal loan in this category would be for a health procedure that is genuinely necessary for your well-being. Cosmetic procedures, however, do not qualify.
3. Travel
Personal loans for travel are so common that many lenders have created specific “travel loans,” which are unsecured personal loans intended for vacations.
It might seem like a good idea to invest in your vacation and see the world: everyone talks about how travel broadens your horizons. However, taking out a travel loan means you’re signing up for years of debt just to… what? Go on a one- or two-week vacation? This doesn’t sound like a smart investment. After your trip, you’ll return to find monthly payments waiting for you, which you’ll need to work hard to cover.
If you’re itching to travel, think carefully about whether the trip is truly worth the financial obligation of a personal loan.
4. Everyday Expenses/Food/Household Items
Unsecured personal loans are quite easy and quick to obtain, which might make it tempting to use one when money is tight at the end of the month. If payday is still a ways off and you’re short on funds for everyday purchases, a personal loan might seem like a good idea.
However, it’s important to remember the same principle: if you take a personal loan for a one-time purpose, you’re digging yourself a hole. You might take a personal loan for everyday expenses this month, but what about next month? Even worse, if you don’t have money for food or everyday items now, how will you have money for the personal loan repayment next month?
This is why personal loans can be so problematic: starting with loans for daily needs can lead to a heavy debt burden that may eventually overwhelm you.
5. Investments/Stocks/Cryptocurrency
Unfortunately, many people take out personal loans hoping to get rich by investing the borrowed money in assets like stocks or—worse yet—cryptocurrency.
There’s NO such thing as a guaranteed safe investment that will assure you a return. Even the safest stock can decline in value, and you might not get your money back. Yes, investing can earn you money, but it’s never guaranteed. If you invest with personal loan funds, you’re digging yourself a hole that’s not easy to climb out of.
In summary, while personal loans can be used for many things, it’s crucial to think twice about what you’re borrowing for. Avoid these five categories to steer clear of unnecessary financial burdens.
