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Five Scenarios When a Loan Isn’t the Answer

Is a loan the answer?

At Ferratum, we promote responsible lending. And, as such, we welcome the following contribution from Sara Patterson from Daily Forex who takes us through five scenarios where lending isn’t necessary.

Thinking of taking out a short-term loan? The low-interest rates these days are very enticing to the consumer and when all else fails, a loan may be the only way to stay one step ahead of the collection agent. 

But, unfortunately, many eager borrowers are choosing to take out loans for all the wrong reasons, a strategy which may actually cause more harm than good. 

There are many reasons for taking out a loan, and while some are legitimate, others are questionable - at best.  

Before you take out a loan, consider the five points below that may seem like good reasons to take out a loan, but may actually be ill-advised or even dangerous.

1)      Taking out a loan to help a friend

It seems very altruistic to take out a loan to help a struggling friend, especially one that doesn’t qualify for his or her own loan.  Many people, however, get stuck with payments that they can’t afford because their friends can’t cover the loan as they’d promised. 

In many cases, these seemingly good-hearted efforts can actually cause damage, as they can ruin the credit of the borrower who will have nothing to show for himself except for a newfound animosity towards a formerly good friend.

2)      Borrowing money to pay for a wedding

Nuptials today are expensive affairs and can set you back a good few month’s income.  If you haven’t saved for this expense in advance, taking out a loan can be a dangerous way to finance a few hours of fun.

 It may sound cynical, but it’s important to mention that with the high rate of divorces these days, borrowing money for a wedding may not be the best idea.  Especially when a small, intimate gathering of close friends and family may wind up being just as meaningful as a larger, more lavish affair.

3)      Taking a loan to take a risk

It is never a good idea to take a loan in order to make a risky investment.  Though this premise is something so obvious that it seems unnecessary to put into print, there are actually thousands or even hundreds of thousands of people who make this mistake annually. 

It would seem logical that an investment which could pay off the loan and still yield income would be a good reason to take out a loan.  Many people, for example, think that they can make a fortune in real estate or through Forex trading or stock speculation. 

These dreams, however, require careful, diligent planning, not haphazard investment advice.  Think about the possibility of an investment going bust, and finding yourself owing money that you can’t afford to pay.  The danger, in this case, should certainly be taken into consideration. 

4)       Loans for gift-giving

There’s no better way to show a spouse, relative or friend that you love them than with a fancy gift, right?  Except, however, when you can’t afford the gift and must borrow money to pay for it. 

Borrowing money for something that isn’t absolutely necessary can cause all sorts of financial troubles in the future, especially if you happen to get divorced later on (see above), or get into a fight that will mar your friendship. Gifts can be meaningful because they come from the heart, or because they cost more than they should have without you needing a loan to pay for them. 

5)       Borrowing money to keep up with the Jones’

If you’re at all practical, you may think that some of the reasons for borrowing money listed above have a bit of reason and common sense behind them. However, you may be surprised to learn that there are many people in this world who borrow money simply because they want to look like they have money.

They just need to have the latest clothing, accessories, vacations or other extravagances, and they figure that one day they’ll be able to pay off the loans. Unfortunately, these desires often lead to borrowing money that will never be repaid, and will more likely cause the borrower’s debt to spiral out of control.  By learning how to control your spending and borrowing, you’ll be able to save up enough money so that you’ll qualify for a loan when you really need it for something important.