With small cash loans abundantly available, it’s easy for people to get carried away and open up new lines of credit without a repayment strategy in place. Some individuals are driven by instant gratification and have a tendency to amass debt.
The only good reason for borrowing small cash loans is to pay off existing debt. Buying that shiny new toy isn’t worth the extra debt. Instead, we recommend diversifying your income streams or save up.
We’ve compiled five situations where small loans might not be suitable for you.
If your current financial situation doesn’t permit you to take your loved ones out on a vacation, then the last thing you want to do is get in debt to go on your dream trip. It can be more relaxing to stay at home than going on an expensive vacation. The economics of an expensive trip that will cause a debt hangover just don’t add up.
Our advice is to save your money to fund your next beach trip.
A dream wedding
It isn’t uncommon for people to go into debt just so they can finance their dream wedding. You would be surprised to learn just how many couples these days are going into debt to pay for their weddings. Just like our advice for vacations, try to save up enough money for funding your wedding.
Or you can get married in a modest setting and save up cash until you can afford to host your dream wedding.
Better yet, try to secure a good deal on a wedding! The only thing you’ll want to avoid is having to spend the first two years of your marriage trying to get out of debt (see: books) that you accumulated to pay for the big day.
Making a big purchase you can’t afford
That shiny new smartphone with 4 or 5 extra cameras will become obsolete the moment you buy it. This is why it’s not worth borrowing money to buy anything that will lose its value in such a short period of time. As a general rule, try not to borrow money to buy a product you can’t pay for in one go.
If the purchase isn’t truly essential, but just something that you really want, maybe taking small cash loans for it is a bad idea. The interest payments aren’t worth it.
Good financial planning dictates that you should only borrow for strategic purchases which will bring value into your life which exceeds the cost of interest.
You don’t want to make a plan for debt repayment
Remember, getting a loan to pay off another loan only works if the interest rate is lower than your current debt. Debt consolidation lets you combine multiple debts into a single personal loan, which is easier to manage.
This isn’t to say that the personal loan is making you debt-free. All you’re doing is moving the debt from one lender to another. Make sure you can cover the cost of the debt repayment and know exactly what you’re getting into.
Start by creating a budget with a list of all your needs, wants, and debts. Prioritise the debts and needs over the wants. Paying back debt is a difficult business (see: books), but worthwhile if you stick at it.
Investing is a long term process for people with a long time horizon of 5+ years. This means they should be prepared to invest the money and not need to touch it for that period. This is totally at odds with a cash loan, which by definition is a short-term financing option.
The average real return on equities is approximately 5% per year in the UK (source: the best investing books). In contrast, the interest payments on cash loans are usually more than 15% per annum. Therefore borrowing using a short term finance facility to invest in the stock market does not have a positive expected return.