PERSONAL loans are so accessible these days. You can even apply for it online. And most don’t need collateral and just base your approval on your creditworthiness.
Unsecured (no collateral) loans always come with high interest rates. And this makes them a doubled-edged sword.
It can help by providing you with financial leverage, but it can also bury you deep in a financial mess. And your financial discipline determines what the outcome would be.
Time and again, I always emphasize the importance of having an emergency fund. Because I strongly believe that the only reason why you should apply for a personal loan is because you have a financial emergency—an urgent and important expense—and you have no other cash source.
With that said, what then are those types of expenses that merit an application for a personal loan? Here’s a list of good and valid reasons.
1. For debt-consolidation
If you have multiple debts from various sources and different interest rates, then this is an option. Apply for a personal loan to pay all of them, and then just focus on paying off that personal loan.
Do take note that you’ll most likely pay more in interest fees if you do this; versus paying off all your debts individually. However, the main advantage here is you don’t need to keep track of different accounts and be confused about your due dates.
2. Pay off high-interest credit card debt
First of all, you shouldn’t really be revolving balances in your credit card. It’s best to always pay the full amount due on your credit card every month.
However, times can go tough, and if you have unfortunately accumulated a substantial amount, then try to find a personal loan with a lower interest rate and pay off your credit card debt (and not use it until the personal loan is paid).
For example, if a P50,000 personal loan with a 12-month term can have a monthly interest rate of 1.4 percent—then it makes sense to take that personal loan to pay off your P50,000 credit card balance that’s incurring 2.5 percent monthly interest.
3. Do home repairs
Your safety and security is important. If there’s a necessary home repair and you don’t an emergency fund, or it’s not enough to cover the expenses, then a personal loan can help.
Remember that having at least 6-months’ worth of your expenses as emergency fund helps a lot during these types of situation, and it also buys you financial peace of mind.
4. Pay for medical bills
Most unexpected expenses are health-related. Accidents and illnesses can happen any time—to you and your family. And this is another reason why you should have an emergency fund, and health insurance (both short-term and long-term). But when funds are low, and time is of the essence, then getting a personal loan might be your best solution.
5. For funeral expenses
Dying can be expensive. That’s why people sometimes ask for “abuloy” or donations during wakes. And it is in such cases that getting a personal loan can likewise help if again, you don’t have an emergency fund.
More importantly, having a pre-need memorial plan becomes your best form of financial protection during these times. Most of them are transferrable to family members, so it doesn’t hurt to get one for yourself if your parents or spouse refuse to get one for themselves because it’s a morbid idea for them.
6. Cover business expenses
If cash is tight and payment receivables are delayed, then a personal loan can help give your business some buffer. It’s a quick and easy process versus applying for a business loan, but it does have higher interest rates.
However, if you need the money as business startup capital, then I think it’s better to just find seed investors or raising cash from other means, rather than taking out a personal loan because there’s too much financial risk involved.
7. Pay for your child’s tuition
Your child’s education is important, and if you believe the same, then you should save up for their tuition throughout the year, and not just 1-2 months before enrollment.
But again, times can sometimes be difficult, and we end up short on funds, especially when school fees suddenly increase. And therefore, it’s a valid reason to apply for a personal loan.
8. To invest on professional development
If there’s a time-sensitive knowledge or skill that you need to learn, which will help you earn more money, then taking a personal loan to enroll in a class or course is acceptable if you don’t have funds.
A friend’s budget was tight from being unemployed when he stumbled upon a great job opportunity. However, applicants are required to know some basic Korean.
He took out a personal loan and enrolled in a language class. After a couple of months, he applied for that job and got accepted.
9. As long as it’s good debt
Avoid borrowing money as much as possible, especially personal loans. However, if you must, then it should be for a good reason.
There are good debts if the money will be used for urgent and important expenses. And it’s a bad debt if it’s for a frivolous or unnecessary expense. Know the difference.
Moreover, always shop around and choose the shortest term with the lowest interest rates. Always do the math and simulate the payments against your cash-flow to guarantee that you can afford to pay it.
Fitz Villafuerte is a registered financial planner of RFP Philippines. To learn more about personal-financial planning, attend the 93rd RFP program this January 2022. To inquire, e-mail firstname.lastname@example.org or text at 0917-6248110.