Personal Loans

When is a Personal Loan the Best Option?

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Ryan Ong

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Usually, when you’re one of two patients and the hospital’s down to one kidney. But life threatening ops aside, there are moments when a personal loan makes sense. Much more than easier, more expensive options…like credit cards. In this article, we look at situations where a personal loan might be a valid idea:

 

The All Important Warning

Please don’t interpret this article as: “Borrowing money is great“. It’s not.

As far as possible, save or earn the money you need. The following describes some specific situations, in which a personal loan could be the least worst option. For the 99% of you who are well-adjusted enough to grasp this, we hope this lowers your interest repayments.

 

Situation 1: Debt Restructuring

Let’s say you visited Kickstarter after nine beers, and inevitably maxed out your credit card. Your rollover debt is now the size of Everest, and accrues interest at 24% per annum. You also don’t have the savings to pay it off in a few months.

Enter the personal loan.

Most personal loans and credit cards have the same credit limit (2x or 4x your monthly income). Odds are, the credit limit on a personal loan is enough to pay off the credit card debt.

But wait, isn’t that just shifting one kind of debt to another?

Yep. The thing is, you’re going from a higher interest loan to a lower interest loan.

 

Cardboard box
As you can see, clever debt restructuring has allowed me to upgrade my home.

 

Personal loans tend to have effective interest rates of around 18% per annum, over a one year loan tenure. And the rate goes lower as you stretch out the loan tenure, to around 13% per annum for a five year loan tenure*. That’s about 6% to 11% less interest than the credit card.

Just be sure to check the terms and conditions of the personal loan. Some loan packages might have added fees that negate this advantage; but there are also personal loans specifically designed to help with debt recovery. Inquire at different banks, or ask a specialist at sites like MoneySmart using their Personal Loans Wizard.

(*Despite the lower interest rate, you are not paying less when you choose a longer loan tenure. The longer you spend repaying a loan, the more interest you end up paying overall).

 

Situation 2: The Other Option is a Friend or Relative

Loans from friends or relatives are called friendly loans. And I assure you, the “friendly” in “friendly loans” is the same one used by soldiers in “friendly fire”.

(That’s when a buddy shoots you in the back. In war it happens by accident. In money matters, probably not).

Friendly loans are the hardest to collect if you’re the lender, and the messiest to repay if you’re the borrower. There’s usually no paperwork involved, beyond an IOU on a sticky note. And if the loan lasts for more than a year, the accounting may as well be left to invisible elves.

 

Guys in wizard robes
Yeah, I got a repayment plan. Just hold the wand and stand in the circle.

 

You just have to hope your record of repayments matches your buddy’s / relative’s.

If you’re between jobs or in a pinch, it may be tempting to borrow from a loved one. Especially if they offer not to charge you interest. But wiser people keep their social and financial affairs separate; if you do qualify for a personal loan, it’s highly advisable to use the bank.

Which would you rather? 18% interest, or a relative who only speaks your name when hiring the next hitman?

 

Situation 3: Funding a Small Side-Business

Maybe you’re starting a small e-commerce site, or a baking business or something. You don’t have time to source for funds, and you don’t have any capital.

Well, you won’t be getting a business loan. Banks lend to businesses with a two to three year track record. And when it comes to evaluating borrowers, there are probably minesweepers in Cambodia who are more laid back. You’re pretty much stuck with three choices:

  • Personal loan
  • Credit card
  • Money lender

Again, a personal loan beats all three when it comes to low interest. And if you need more information on side-businesses, follow us on Facebook! I’m constantly annoying successful side-businesses for tips.

 

Using a laptop
“My idea is to start a password company. As in, we help you think up a password. It’ll be huge.”

 

Situation 4: You Need Flexibility

Sometimes, you don’t know what exactly you’ll need the money for, but you do know you’ll need it.

Say, for example, you’re awaiting an insurance payout to cover medical bills. At the same time, you also need some big repairs done on the house.

Now you could take out a renovation loan for the house, and then count on the insurance payout to deal with the medical bills. But since the renovation loan can only be used for the house, that payout had better come on time.

But let’s say you’re wiser. You know that a good zero percent of insurers are consistent with payouts. Well you could take out a personal loan instead; that way, you can use the money for the medical bills if the payout doesn’t come on time, and for the repairs if it does.

Of course, you’re paying for this flexibility. Highly specific loans, such as renovation loans, tend to have lower interest than personal loans. So weigh the options with your needs carefully. What’s probably of more importance when choosing a personal loan is making sure that you sign up for the right loan package. It’s a lot easier to scan through the best personal loan rates in Singapore now with MoneySmart’s Personal Loans Wizard. You can get all the information you need before deciding.

 

Image Credits:
Aleksandr Zykov, Meathead Movers, drinkyclown, mbrochh

Have you ever needed a personal loan? Comment and tell us about it!

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Ryan Ong

I was a freelance writer for over a decade, and covered topics from music to super-contagious foot diseases. I took this job because I believe financial news should be accessible and fun to read. Also, because the assignments don't involve shouting teenagers and debilitating plagues.