What You Should Never Use a Loan to Purchase

There are some things in life that you should never use a loan to finance. Here are four of the biggest no-nos when it comes to using loans.

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Big-ticket items

It’s generally a bad idea to finance big-ticket items with a loan. These are items that will depreciate in value quickly or items that you may only use for a short period of time. Some examples of big-ticket items include cars, boats, RVs, jewelry, and art. You may be tempted to finance these items because you may not have the cash on hand to pay for them outright. However, it’s almost always a better idea to save up and pay for these items in cash.

A car

A car is one of the most expensive purchases you’ll make in your lifetime, and it’s not an investment that appreciates over time. In fact, as soon as you drive a new car off the lot, it depreciates by 20% or more. That means if you finance a $30,000 vehicle, it could be worth only $24,000 just a year later. To make matters worse, cars are also notorious for having expensive maintenance and repair bills. So when you’re trying to decide whether to finance a car purchase, ask yourself if it’s really worth taking on that much debt.

A house

A house is the most expensive purchase you will ever make, and it is not an investment that will pay off in the short term. It is also a depreciating asset, which means that it will be worth less and less as time goes on. For these reasons, it is not a good idea to purchase a house using a loan.

Education

Education should never be something you put on a loan. You are investing in yourself, and taking on debt to do so is rarely a good idea. There are scholarships, grants, and other forms of financial aid available to help you pay for school. You can also look into community college or online options which are typically much less expensive than a traditional four-year university. If you absolutely must take out loans for education, make sure you exhaust all other options first and only borrow what you absolutely need.

Depreciating items

Loans should not be used to purchase items that will depreciate in value quickly. This includes items such as cars, RVs, boats, motorcycles, and ATVs. The reason for this is that you will end up owing more on the loan than the item is worth.

Clothes

While a new wardrobe may be tempting, using a loan to finance clothing is rarely a good idea. The reason is twofold. First, clothes are a depreciating asset, meaning they lose value over time. A loan is meant to be used for an appreciating asset, such as a home or a car, which will increase in value over time. Second, clothes are a necessity, which means you should be able to pay for them with cash. If you can’t, it’s an indication that you’re living outside your means and should re-evaluate your spending habits.

Furniture

While paying for your furniture upfront in cash may not be an option for everyone, it’s generally a good idea to avoid using a loan to purchase furniture. The reason for this is that furniture is considered a depreciating asset. This means that as time goes on, the value of your furniture will go down, not up. So, if you end up having to sell your furniture or default on your loan, you will likely end up getting much less than you paid for it originally. In some cases, it may not even be enough to cover the remaining balance on your loan.

Electronics

This is a big one. Electronics are notorious for dropping in value quickly. That goes for both big-ticket items, like TVs, and smaller devices, like phones and laptops. A new TV might set you back $1,000 or more, but its value will drop precipitously as soon as you get it home. The same goes for phones and laptops; they might lose a third of their value as soon as they hit the shelves.

There are a few reasons for this. First, electronics manufacturers are always coming out with newer, better models. That means the TV you just bought is already outdated. Second, electronics are delicate items; they’re easy to break, and even if you take good care of them, they’ll eventually show wear and tear. That translates into a lower resale value down the line.

So if you’re thinking about using a loan to buy a new TV or laptop, think again. You’ll likely be upside down on the loan before you know it.

Luxury items

There are a few things in this world that you should never use a loan to purchase. luxury items top that list. A loan is not free money. It is money that you have to pay back with interest. That means that if you purchase a luxury item with a loan, you are paying much more for that item than if you had just paid for it outright.

Jewelry

While it may be tempting to use a loan to finance a large purchase like jewelry, it is generally not a good idea. Jewelry is a luxury item, and its value can fluctuate greatly. It may appreciate in value over time, but it could also lose value quickly if the market changes.

In addition, jewelry is often difficult to resell. If you find yourself in a financial pinch and need to sell your jewelry to get cash, you may end up selling it for much less than you paid. For these reasons, it is generally best to avoid using a loan to finance the purchase of jewelry.

Vacations

You’ve been busting your hump at work all year long and you finally have some vacation days to enjoy. You want to go big and take the trip of a lifetime, but you don’t have the cash on hand to pay for it. Should you take out a loan to finance your dream vacation?

As a general rule, you should never use a loan to finance a luxury purchase like a vacation. There are two main reasons for this:

You could end up paying more than the original cost of the vacation.
For example, let’s say you take out a $5,000 loan to finance a trip to Europe. The loan has an interest rate of 10%, and it will take you two years to pay it back. When all is said and done, you will have paid a total of $5,500 for your trip ($5,000 in principal + $500 in interest). So, if you had just saved up and paid cash for the trip, you would have saved yourself $500.

You could put your other financial goals at risk.
If you finance a luxury purchase like a vacation with a loan, you will end up paying off that debt while neglecting your other financial goals. For example, let’s say you were planning on using that $5,000 to make a down payment on a house. By taking out a loan for your vacation instead, you will push back your homeownership goals by two years (assuming it takes you two years to pay off the loan).

Dining out

Dining out is a treat that many of us enjoy, but it can also be a significant expense. If you’re trying to save money, you may want to consider cooking at home more often. But if you do choose to eat out, there are some things you should never use a loan to pay for.

alcohol
While enjoying a drink or two with your meal can be part of the dining experience, it’s important to remember that alcohol is not a necessity. If you can’t afford to pay for your alcoholic beverages outright, it’s best to abstain from drinking while dining out.

tip
Asking for a loan to cover the cost of your tip is not only rude, but it’s also unnecessary. If you can’t afford to tip properly, you shouldn’t be dining out in the first place. Your server depends on tips for income, so skimping on the gratuity is not an option.

valet parking
Valet parking is a convenience, but it’s definitely not a necessity. If you can’t afford the added expense of valet parking, simply park your own car. It may take a few extra minutes, but it’s worth it to avoid taking on debt.