A consumer loan gives you flexibility and the opportunity to spend money however you see fit. Unlike credit cards, these loans are usually offered with a lower interest rate and a longer down payment.

Here we take a closer look at when it’s appropriate to use a consumer loan, and vice versawhen it isn’t.

When can a consumer loan be the appropriate form of financing?

An unsecured loan means that the borrower does not need to provide collateral for the loan. However, lenders have other ways to get their money back, so this should not be misunderstood.

Such loans are more suitable for people with stable finances. In other words; people with stable income and a low or moderate level of family debt.

With a decent credit score, you would also be rewarded with lower interest rates. That’s because the risk of default is lower, seen from the banks’ perspective.

Unsecured loans are also cautious in those cases where there are no realistic ways to guarantee the loan. For example, you would never finance your house this way (which is why we have mortgages), but you may want to use it for other purchases that cannot be guaranteed.

Unsecured loans should also be used to finance assets with lasting value. For example, to build a shed where you can work on your hobbies or a lawn mower that will last you many years.

What should it not be used for?

Here is a short list, with some items that one should not finance with unsecured loans:

one. Fixed monthly costs: Unless we’re talking about a one-time exception (say the washer broke), you should never use it to cover your fixed monthly costs.

If you can’t afford these expenses on a monthly basis, it’s an indicator that your household budget is under a lot of pressure. Borrowing money to pay bills will only add to the financial strain on your household.

2. The initial payment of a mortgage: You should never finance down payment requirements with anything other than your own savings. There are several reasons for this, but the biggest has to do with the financial risks you are taking.

If interest rates rise (or if you lose your income), you’ll have serious trouble meeting your monthly mortgage bills. An unsecured loan would only add stress to the situation.

Also, let’s not forget why banks are required to require a down payment in the first place. It’s so you have less financial risk when you sign the mortgage.

3. Interest on other loans: This may seem obvious, but it should not be ignored. Never use a consumer loan to pay interest on other loans. You are simply pushing the problem in front of you, adding fuel to the fire.