Personal loans have been a matter of some debate for a long time, both in South Africa and all across the world. One of the reasons the topic has received so much attention is because of the misuse of personal loans in the past, possibly because people didn’t really understand what they were for, so they were used for just about everything.
One of the central benefits of taking out a personal loan over other types of loans is how easy it is to apply for one. This isn’t a home loan, so we aren’t talking about dozens of pages which require every relevant fact in excruciating detail. Naturally there are formal checks and balances which you’ll have to get through but in general a personal loan is quick and hassle free to take out. Unlike a home loan, however, the interest rate for these loans can vary quite a bit and will almost certainly be higher than a more specific type of loan. In short, it’s more convenient but you’ll pay more in the long run if you don’t settle the loan relatively quickly.
So when should one consider using a personal loan? We’ll look at a few scenarios where it could be of huge assistance.
#1 Monthly Shortfall
One occasion where this kind of loan can really help is if something unforeseen happens, such as your fridge breaking down. You hadn’t planned on the expense for repairs or a replacement but you can’t go without a fridge. A personal loan could help you solve the problem quickly without costing you much on repayments in this scenario. On the other hand, it may not be a wise idea to use a personal loan to furnish your entire house. The idea is making up for an unforeseen shortfall, not going on a R100 000 spree.
#2 Extra Holiday Spending Money
Courtesy of momagain@40
Karen du Toit says:
“The MomAgain@40-clan decided that this year was going to be the year that we visit my brother in America. We said that we would save and not go anywhere, and that we would make it happen!
Because, if not now, then it most probably would never happen.
But this year has been tough! Hubby is still busy settling into his own business. The Student is doing a post-graduate and we have to the foot the whole bill. In previous years she had a bursary. Little Miss has also started with school, and there are all these extra-curricular activities that cost an arm and a leg.
It is very difficult to save when all the normal stuff needs to be done, and a yearly bonus is nowhere in sight!
I have been seriously thinking about taking out a loan to make the visit happen. Our plane tickets have been bought, and the visas have been approved. Now it is only (ONLY) the pocket money, but the exchange rate from ZAR to US Dollars is very high.
That loan would really come in handy right now, as we are flying within a month, and we would love to do as much as possible while we are overseas! There are so many interesting places to see, and we would love to have a taste of the local cuisine as well.
This could be a once-in-a-lifetime opportunity so we’d like to enjoy it to the fullest. Bear in mind though that taking out a loan for this sort of thing is a personal choice, and may not be recommended for everyone.”
#3 Odds and Ends
Most types of loans need to be applied to a very specific purpose. A business loan must be used for your business and you can’t use a car loan to pay off your credit card debt – it goes into your car and that’s it. Due to the unshaped nature of a personal loan, however, you can use it for anything from an extra shopping spree to buying text books and school clothes. In short, it can come to the rescue for a wide array of small things which would otherwise add a huge amount of stress to your finances for the month.
#4 The Quick Repayment Plan
Courtesy of Imod Digital
No matter what the situation, taking a loan is always a difficult decision. There are good loans and there are bad loans. The best kind of loan is one that assists you in acquiring an asset or something that will benefit you positively in the long run (a property, education, etc). A bad loan is quite the opposite, such as taking a loan to purchase a car (depreciating asset versus that of an appreciating asset like a property). An exception may, however, be made for a car which is income generating, such as one used for work.
For me, the most important thing about taking a loan are the terms - what interest rate do you get, what are the monthly instalments and how long do you have to pay it back? Interest rates are the number one thing that people don't understand. A high interest rate will have you paying that loan off over a really long period of time and the actual amount you end up paying back will be substantially higher than the amount you borrowed.
When it comes to paying back loans, never miss repayments and if you're ever in a position to pay a little more, do so! Just the addition of a further R100 a month can make a really big difference to the overall amount you pay back and the amount of time it takes to pay back.
#5 Debt Consolidation – Sometimes
This is one of the central debates around personal loans, again mostly because it’s been done poorly in the past. If you’ve got a serious muddle on your hands, because you’ve been using too many different credit cards you barely know what’s happening anymore and you’re worried that you’re missing payments and making a mess, you can use a personal loan to pay off everything at once. What you have to remember is that this is not a cure for bad repayment ethic, you will need to pay back the personal loan ASAP or you’ll fall back into the same pit or worse. The interest you pay on the personal loan is yet another expense, so first be sure that this balances out with your need.
And there we have it. Personal loans can be of great value but, like anything else, they must be applied correctly or they won’t work. If you’re a home owner with massive debts then there are better options available to you, but for a little short-term assistance this loan can be a real boon. Remember to consult a financial planner or broker regarding your particular needs.