A recent feature on Refinery29 reports that more and more people are taking out loans in order to fund their expensive vacations.
In an age where going on holiday can easily cost up to triple the amount of rent you pay (if not more), it’s easy to understand why there’s such a huge temptation to take out a loan and fund a trip.
And really, we spend such a big part of our lives working hard (and sometimes not having enough to just spoil ourselves a little), that wanting something for ourselves feels more than a little justified.
The thing is though, taking out a personal loan for something that’s a want and not a necessity may pose some issues and be harmful to you and your financial situation in the long run.
A lot of financial experts understand the need for loans, but often caution against taking out loans for the wrong reasons.
No one is saying that you can’t use your loan for whatever you want, but consider how you go about making your loan work in the best way that it can for you.
How can you avoid a debt trap?
I spoke to Carla Oberholzer debt advisor and public relations officer at DebtSafe, who says that while loans should be avoided as much as possible, she understands that life happens and in the tough economic environment we find ourselves living in, says that sometimes loans are necessary.
So when you’re taking out a loan, consider why you’re taking one out. Carla says that every person’s situation differs.
• A single mother perhaps has to pay for her child’s school event abroad and does not have saved up cash/savings available to pay for the R30 000 trip for example; OR
• A woman wants to continue with her tertiary studies and considers a personal loan to pay for her tuition and various fees…
As you can see personal circumstances are endless and vary from woman to woman…
“A handy tip from my side - Before you get caught in a situation where you are considering a personal loan – I would really encourage our South African women to always do their financial planning carefully and that they should always try and have an emergency fund as backup. “
“Yes, life tend to throw lots of curve balls at the same time, but we must be best-prepared for it. Even if you start with a R 500 a month, start small and grow your savings from there – adding to the amount whenever you can. “
READ MORE: Money advice for millennials who are struggling to save while paying of their student loans
If you are going to take out a loan, Carla suggests really taking a deep look at your income and doing proper research.
- Is your income stable?
- Have you compared different loan rates and terms and condition?
- Have you done some maths beforehand just to give yourself a starting point?
- Can you pay back a little more than you need to? (Make sure to read the fine print for this one though – Carla says that some loans include a pro rata interest rate that you’d need to pay if you want to settle sooner)
Don’t agree to anything until the credit provider has clearly explained how all the fees and premiums work. And remember, the moment you agree, there is an immediate expectation to pay the first installment when it’s due.
What should you never use your personal loans for?
“You should never take out a personal loan to keep up with your lifestyle and luxuries (going on holiday or buying that expensive jewellery or car for yourself/your loved ones)! It’s a big no, no,“ says Carla.
“Personal loans should also not be used as a cash flow tool or a consolidation tool (borrowing from Peter to pay Paul).
Also, if your gut tells you, that you’ll be worse off – trust it. Rather start with your emergency fund (as mentioned above) to avoid incidents like this.
So rather plan ahead and delay your vacation for a year and use that time to save up for it instead of impulsively taking out a loan that may only land you in deeper financial trouble.
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