Even if you are an accomplished accountant, no matter how experienced and talented you are at managing income and budgets, you will need to borrow money from time to time.
Life is unpredictable. And other than emergency situations when a heavy duty inflow of cash is required, a new car or a new living room can be pretty taxing on your savings as well.
It is at times like this when a personal loan should be considered.
In spite of the general feeling that someone must be broke to even thinking of taking up loans, the reality is that personal loans are common among the middle class and even the rich.
It’s about numbers and leverage.
People wonder how banks stay in business when they don’t lend to the people who need money most. The answer is that borrowing money is a common place among the affluent as well.
Signing up for a loan can be a pragmatic choice when:
It allows you a higher access to cash compared to overdrafts and credit cards
Credit cards limits are often set between 2 to 3 times an individual’s monthly income. While personal loans can often go up to 6 to 12 times. So if the loan quantum is a paramount concern, your choices could be limited to this.
The accumulated interest payable is lower than other credit facilities
Even when you find that the interest rate is higher than other credit facilities available. You might find that the total interest you pay would be lower. This is often because interest on personal loans are calculated on a flat rate. The calculated interest is then added to the principle, then divided into the number of installment payments.
You need to discipline yourself to repay everything by a certain time frame
Many consumers abuse the rollover feature of credit cards. They pay the minimum sum and carry forward the balance to the next month. This is a big reason many people, young and old, are getting knee deep into debt.
If you feel that you could suffer the same consequence of rolling over your debts, a personal term loan will be able to instill discipline into your repayment behavior. You can expect to be penalized when repayments are late and short.
The motivation to avoid those penalty fees should get to you diligently make timely and proper payments until it is finally repaid in full.
It is the most convenient for your tight schedule
Sometimes, saving a little money is not worth the effort required. You could very well be earning more money by spending the time required at work than to spend a day at the banker’s office. Personal loans are heavily promoted by mobile bankers these days. So streamlined is the process from application to disbursement these days, that all you have to do is make a few phone calls and scan a few documents into digital format.
You have no credit line
It’s not uncommon for people to not have any credit cards. Some people just prefer not to have it so that they will not grow dependent on it.
In this case, getting a short term loan and paying it off will both help you get the cash you need and avoid getting a card.
As long as you can afford the loan repayments and make an effort to look around for competitive rates, getting a personal loan can be pretty simple and stress free. It will meet your short term needs without negative long term repercussions.
But here are some situations where you might want to give it a pass.
The age-old wisdom that we should never allow ourselves to get into debt still holds a lot of weight in this day and age.
Even though it has never been as easy to obtain access to credit today, it also implies that it has never been as easy to get into debt too.
The amount of money you need is as low as a few hundred dollars
Yes repayment for small amounts could require little effort. But the smaller your loan size, the higher you can expect your interest to be.
Secondly, many lenders have minimum loan sizes. This could potentially lead you to taking up a bigger loan than you intend to just to get access to that extra few hundred dollars. If the amount is small, you could be better off borrowing from friends or draw down from a balance transfer.
You are looking at a very short tenor
You might feel that you will not spend much on interest rates by taking up a short tenor.
However, take note that the lower the tenor the higher your payments will be. A miscalculation can get you into cash flow problems. And if your time span is short, you could possibly use your credit cards by rotating them.
You are using the money to remodel your house
In a situation like this, do explore the possibility of taking up a home equity loan.
It will have a much lower interest rate since it is a secured loan. And bankers have little objection as you are using the money to improve your house which can lead to appreciation. It will be a lesser risk in the eyes of the bank.
The important thing to remind yourself that should you take the route of home equity loans, your house is a collateral that the lender can takeover should you default.
