Thanks to modern technology, a loan application only takes a few clicks of a mouse. And even before the Reserve Bank of New Zealand’s recent lowering of the Official Cash Rate to 0.25%, there were some great low-interest loan deals on the market.
But just because somebody offers you something, doesn’t mean that you should take them up on it. Shouldering debt, especially a personal loan, is something that should never be taken lightly. So before you splash somebody else’s cash, crunch the numbers on your finances and consider if your loan is truly justified.
Good Reasons To Take Out A Personal Loan:
If you have a bunch of different debts, for example credit card debts or outstanding personal loans, it can make sense to streamline them into one easy-to-manage payment. It’s also likely that you’ll be able to organise a better interest rate, saving you money. This is especially true if you take out a secured personal loan – for example on your house or other valuable asset – rather than an unsecured loan, as they tend to come with higher interest rates due to lenders’ increased risk exposure. For more information on debt consolidation, read our How to Consolidate Your Debt story.
When it Has the Potential to Save Your Life:
While we are fortunate to have government-funded health and disability services in New Zealand, the public system isn’t perfect. If serious illness suddenly affects you or a family member and urgent treatment becomes a priority, private healthcare can sometimes be the only option. Of course, if you’ve adequate health insurance, this is less likely to be a problem, and it’s always a good idea to make sure you and your loved ones are covered: for more information, check out our story How Getting Health Insurance Can Help You Jump the Queue. If not, a personal loan can provide immediate access to the best healthcare when it’s needed most.
When it Has the Potential to Save You Money:
If, in the long run, taking out a personal loan will save you money, then it’s a no-brainer. For example, your washing machine is kaput and you don’t have the money to replace it, and you start spending $25 per week at the laundromat. Even once interest repayments are factored in, a personal loan used for a new appliance would be a cheaper option given the machine is likely to last a decade.
When it Has the Potential to Make You Money:
You have a fantastic idea for a new start-up, either full-time or on the side of your main job, but you need seed capital. You get the offer of a new job that pays more than your current salary, but you’ll need to purchase a new car for the commute. You want to study for a qualification that will further your employment (and earnings) potential. From car loans to student loans, when managed correctly, no-one is going to suggest that you’re wasting money when carefully investing in your future.
When it Has the Potential to Add Value:
Most people’s biggest asset is their home, and sensible improvements can add greatly to its worth. We’re not talking luxurious hot tubs or extravagant fixtures and fittings that don’t have broad market appeal – but the basics, like modern fresh bathrooms and kitchens, or opening up a wall to create flow onto a deck. Purchases like these are costly, but if done with on-sale value in mind, can reap major rewards when it comes time to sell.
Not So Good Reasons To Take Out A Personal Loan:
When All it Buys You is a Suntan:
Even when there’s not a global pandemic limiting travel, you should curtail all unnecessary overseas trips if you don’t have the money to pay for them. Tickets, accommodation and spending money all adds up and there’s nothing worse than post-holiday blues compounded by months and months of debt repayments.
When What it Buys Depreciates Quickly:
Any brand new item is going to depreciate by 15% the moment you get it out of the shop, thanks to the government’s share of the transaction: GST. Plus you’ll be paying interest on that 15% if you’ve taken out a loan for the purchase! And the value of many items will continue to depreciate quickly in the months that follow: think cars, electronics, computers and sporting equipment. This can quickly leave you paying off a loan that’s greater than the value of your asset.
When You Don’t Need What You’re Buying:
Jet skis, boats, expensive bling. There’s nothing wrong with the luxury trappings of life and big boys toys if you can afford them. If you have to take out a loan to purchase them, it means you can’t afford them … at least in the short-term. Instead, create a financial plan and enjoy the anticipation of working towards your savings goal.
When the Money Would Be Better Spent on Happily Ever Afters:
The average cost of a New Zealand wedding has hit $35,000 – a huge sum given the median yearly wage is $52,832 and the median house price is $640k. If you’re planning to marry and are renting, there’s a simple question to ask yourself: is a house deposit more important than feeding and watering your relatives for an evening? Getting into debt to finance your nuptials doesn’t make a lot of financial sense. For more practical tips on how to avoid a marital blowout, read our story: Wedding Costs & How to Avoid Overspending.
While Canstar’s research can help you compare the different personal loans on the market, a personal loan is a personal decision, and one that should be made only after thoroughly going through your finances. It’s not easy money to be splashed on a purchase that you’ll live to regret … while still making loan repayments months down the line.
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