What is a personal loan and when to take it?

Personal loans, when carefully used can be great help in a bad situation. For some people, it is the light at the end of a turbulent financial tunnel.

Personal loans are great because they are unsecured loans and the money can be issued quickly with minimal fuss. They are also easy to apply for although their requirements may be a bit more stringent and the interest rate far higher than what most people are used to.

Being an unsecured loan means that the borrower need not provide any form of collateral such as a house or a car for the loan.

Personal loans are normally used for:

1. Debt consolidation
2. Putting a child through school
3. Situations where you need cash urgently

A personal loan should be taken when you need cash immediately and where you can visibly see returns from it. If you need extra money to put your child through university, this is a decent enough reason. The returns are a good education for your child which could see him in a well-paying job down the road. If you have to pay for medical or hospital bills, this is also a good reason to take out a personal loan.

Debt consolidation is another cause to take up a personal loan. However do this only if you have many outstanding debts. You can consolidate all of them under one easy to pay banner and use the personal loan to clear it while paying back only one debt/loan instead.

However, if you have been paying your credit card debts, there is a possibility of the interest rate having dropped over the years. If it is financially sound for you to pay off your debts at a reduced rate, then do so because in some cases, consolidating your debts may have you paying far more than you actually have to.

Having an avenue for fast loans is great but the temptation of abusing it is very high. Some people take out personal loans for trivial matters such as home improvement or buying a car. Things like these you can and should save for.

Besides, a car is a depreciating asset and taking a personal loan on it means that after paying back the high interest rate, you have a car that is worth significantly lower than what you originally paid for. Not to mention the COE would force you to either reapply or sell your car for scrap. There are far too many arbitrary costs and unpredictability involved in taking a loan for a vehicle in Singapore so avoid doing it unless you desperately need it.

Taking a loan for home improvement is also not a good idea. While improving your home may contribute to its overall value, you are still taking a loan where you will end up paying back more money than you borrowed (due to a higher interest rate) for something you may or may not sell.

The end result is what works best for you and if taking a personal loan will help you in your finances, you should seriously consider it. If it were to be an excuse for you to take the money and use it for trivial matters, do not go through with that under any circumstance.

Personal loans are not a quick fix for a minor issue. It is a high interest supplement to aiding and mitigating your finances.

Written by: Christopher Chitty

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