If you dream of vacationing on an exotic island – or have visions of a glorious kitchen remodel – you might be tempted to take out a personal loan to turn those fantasies into reality.
But using personal loans or other forms of debt to finance “wants” – rather than needs – is almost certain to backfire, says Todd Christensen, a financial counselor and education manager at Debt Reduction Services in Boise, Idaho.
Why it isn’t a good idea to finance “wants”
“Debt is financial manure,” he says. “No matter what, it’s gonna stink.”
Christensen says debt only makes sense if it offers true financial benefits. Examples of such debt often – but not always – include mortgages, student loans or business loans, he says.
However, steer clear of taking out personal loans or other forms of debt simply to purchase a service or good – or something that makes you feel “good.”
“Generally, taking out personal loans for wants will lead to a financial loss,” Christensen says. “We end up spending more in interest and principal payments than the benefit it returns.”
Personal loans and lingering regret
In addition to hurting your wallet, taking on debt to pay for consumer desires probably will not feel good over the long haul.
“Studies are pretty clear that we will enjoy the vacation much more if we save up for it rather than put it on a credit card and pay for it later,” Christensen says.
To illustrate why this is true, Christensen suggests imagining you are at a theme park and are waiting in line for an hour before boarding an exciting roller-coaster ride.
“The whole time we are in line, the anticipation is building and our exciting is growing,” he says.
Now, imagine instead that your one-hour wait in line comes after you already have enjoyed the roller coaster.
“For a few minutes, we might remember the twists and turns with a thrill,” Christensen says. “But soon, the excitement is gone. There is nothing to anticipate.”
The same effect is likely after we purchase a “want,” and then face the hangover of paying off the debt.
“Our memories of (the good) will be tinged by the frustration of having to pay for something that is in the past,” Christensen says.
How to fix a personal loan mistake
If you’ve already taken out a personal loan to fund a “want,” don’t fret: Christensen says there are several ways to escape your debt trap.
The best solution is to simply eliminate the debt quickly. “Accelerate repayment — send extra payments,” he says.
If you are struggling to pay the debt, try to negotiate a lower interest rate with your creditor. Or, seek help for your situation.
“Use a debt management program through a nonprofit credit counseling agency to repay the debts at a lower interest rate,” he says. Try to craft a plan that will get you out of debt in five years or less, he adds.
Finally, if your debt has become overwhelming, try to negotiate a settlement with the lender to accept less than the balance owed. As a last resort, consider bankruptcy.
Christensen says all other options for managing your debt – including debt consolidation loans, balance transfers, and home equity loans – are “gimmicks” and should be avoided.
“These are not debt-elimination techniques,” he says. “These are debt transfers. They address the symptoms of debt but not the causes.”
Once your debt is under control, pledge not to make similar missteps in the future. And remember never to use personal loans to finance things that are not necessities, such as big vacations.
“If we save up for it over time, our anticipation and excitement grow,” Christensen says. “We can experience the thrill of our time on vacation without any tinge of regret.”