6 Times You Should Never Take a Loan

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Banks create loans everyday, but this doesn't mean you should apply for one without fully weighing the risks. Sure, a loan can help build your credit history, and makes it easier to purchase high-ticket items, such as a home and an automobile. If you can afford a loan and you're able to manage it responsibly, getting approved for financing can be a godsend. But, there are clearly times when you should avoid taking out a loan at all costs. These are six of them.

1. The Bank Requires a Cosigner

A bank may not approve your loan unless there's a cosigner. But even if a parent or sibling agrees to cosign, the fact that you even need a cosigner is a sign you shouldn't get the loan. Seriously, dude, stop and think about this for a bit. You're not qualified — harsh reality, I know — so this loan probably isn't the best decision.

If a lender says you don't qualify on your own merit, rather than get a cosigner and put a Band-Aid on the situation, get to the root of the rejection and fix your credit in order to qualify on your own. Besides, a cosigner is a joint applicant, and the way you manage this account affects their credit history. Unless you want to risk damaging a relationship, leave friends and relatives out of your financial matters.

2. You Have a Low Credit Score

A low credit score doesn't mean you can't get a loan, but you'll certainly pay more for it than someone with good credit. Since you're a risky applicant, the bank will charge a higher interest rate, which also increases your monthly payments. Depending on how much you pay, getting a loan with bad credit can be a very costly decision in the long run. You're better off postponing the loan, fixing your credit, and then applying once you can qualify for prime rates.

3. To Pay for an Upcoming Vacation

If you're burnt out and need a break, it might be time for a vacation. Holla! But if you don't have cash to afford a vacation, getting a loan isn't the answer. Vacations are a time to relax and spend time with your family — not complicate your life. Unless you're in a position to pay off a loan immediately after you return home, think twice before financing your vacay. Yeah, it might be a trip of a lifetime and create memories for years to come, but it's not worth coming home to added financial stress, especially if you have to work more to pay off this loan. As an alternative, look into shorter getaways closer to home that won't cost a lot of money.

4. To Pay for a Wedding

Some people think the bigger the wedding, the better the wedding. These same people also think weddings are a once-in-a-lifetime event (and let's hope it is), so it's okay to splurge and go deep into debt. But given that 50% of all marriaged end in divorce, there's a solid chance that the wedding debt will last longer than the vows. A real kick in the you-know-whats, isn't it? I don't have firsthand experience (my husband and I are still holding our marriage together, but we also didn't spend a fortune on a wedding), but I'm guessing it's pretty frustrating to make payments on a wedding loan years after you and an ex-spouse break up. Anger-inducing, even. Some people have the fairy tale and enjoy happily ever after, but there are no guarantees. If you can't afford a lavish wedding with your own money, don't have one. You will regret it later.

5. When You're Borrowing Against Your Retirement

The decision to take a loan against your retirement account is ultimately your decision, but there are many factors to take into consideration. This money can be useful during a hardship or if you're buying a house and need a down payment. But a recent study shows that approximately $6 billion is lost to 401(k) loan defaults annually. That's a lot of well-intentioned people failing to repay their 401(k) loans.

If you're committed to paying back your retirement account, and if retirement is several years into the future, borrowing from your account isn't the end of the world. But if you don't think you'll be able to replenish an IRA or a 401(k) account, or if retirement is right around the corner, this isn't the time to gamble with your future.

6. You Can't Get Traditional Financing

If you can't get traditional financing from a bank, you might be tempted to get a payday or title loan. These loans can put fast cash in your pocket, and they don't typically require a credit check. But these are two of the riskiest loans available. Title loans have to be paid in full within two weeks and you'll pay high fees — as much as $25 per every $100 you borrow. A car title loan isn't any better. These loans require a paid off car and your title acts as collateral — but there's a catch: If you can't pay back a title loan, you lose your car. Steep sentence, for sure. Here's another catch: Nobody's wants to drive your broke butt around town because you can't manage your money, so don't make foolhardy financial mistakes.

Did you take out a loan when you shouldn't have? What happened?

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