Similar to any other loan, a personal loan is money that you borrow from the bank that you pay back in fixed monthly payments over a set period of time. The loan period can be as short as 12 months or last up to 10 years, and the interest rates differ accordingly. Unlike car loans and housing loans, personal loans aren’t limited to use for any specific purpose nor tied to any asset for collateral.
Since personal loans can be used for any number of personal reasons that don’t have to be pre-approved by the bank, you may be uncertain about when it’s a good idea to take out that personal loan, and when it would be considered a bad financial decision to get one. Here are a few situations in which getting a personal loan will likely help you out financially.
To consolidate your outstanding credit card debts
One common reason people take out personal loans is to consolidate their multiple credit card debts. Getting a personal loan to consolidate your credit card payments will not only allow you to combine all your credit card bills into one single payment, it may also work out cheaper for you. Although it may seem counter-intuitive to pay off your debts by taking on more debt, the key factor that makes all the difference here are the interest rates.
Credit card interest rates typically range from 15%–18% per annum, which is significantly higher than personal loan rates which are significantly lower. This means you would be better off taking out a loan to pay off your outstanding credit card bills rather than raking up high interest payments on your credit cards. Standard Chartered has a personal loan that designed just for this purpose of debt consolidation, the Standard Chartered CashOne Debt Consolidation Plan and offers a rate as low as 6.99%. Of course, don't use this as an excuse to purchase beyond your means with your credit cards!
One thing to note is that some credit cards offer a 0% balance transfer facility, which allows you to move our credit card debt from one card to another with an interest-free period of around 6–12 months. Most banks use this as an offer to move that balance from one bank's credit card to another. If you can pay off your credit card debt within this short period, balance transfer loans are a much better option for credit card debt consolidation than taking out a personal loan. While personal loans do remain an option for debt consolidation, bear in mind it shouldn’t be the first one that you turn to.
For emergencies, repairs, and replacements
One of the main reasons we’ve been taught to keep aside some money from a young age is to "save for a rainy day". Of course, as children this might mean that we threw a ball through our neighbour’s window and had to pay for it, but as adults we stand to incur costs that even our emergency funds can’t cover. Your aging car may need some spare parts replaced or the roof of your house may desperately need repairing. Those who don’t have extensive insurance policies stand to be at even higher risk of having to pay for one of these emergencies at some point or another.
In short, it’s best to prepare for the unexpected, but when the worst happens and you just don’t have the funds to cover the cost of these unwanted expenses, this is the right time to look into personal financing. KFH Murabahah Personal Financing-i offers personal financing for up to 10 years if you’re looking for a loan that allows you to make smaller, more affordable payments each month. Just remember that the longer your financing duration, the higher you end up paying in interest.
For once-in-a-lifetime expenses
So, while repairs and replacements are necessary expenses that crop up and require almost immediate attention, what about big expenditure on something that you have spent a long time planning for? One example of this footing the down payment on a house – obtaining a personal loan to cover the down payment in addition to getting a housing loan for the rest of the amount is quite common these days, even when developers design schemes that significantly reduce the initial down payment figure.
Another hot topic is whether or not to take out a personal loan for your wedding. Although this is an easy way to assure your dream wedding becomes possible, you should take on a loan amount that’s just enough to cover the necessities of the ceremony, and that you’re certain can be repaid from any expected contributions from guests and family. Remember, just because you’re taking a loan out for your wedding, it doesn’t mean you have to go all out and make it a big one – loans have to repaid!
Of course, you should be aware that this "once-in-a-lifetime" reasoning shouldn’t be extended to other unnecessary "luxury" expenses just because it’s always been your dream or on your bucket list. It may be an advantage for you to take out a personal loan for your wedding, property down payment, or even home renovation as the Citibank Personal Loan suggests, but for things like going off on an expensive holiday, you’re probably better off saving up instead.
For your business
Yes, you could get a business loan if you wish to use the money for business purposes, but you could also take out a personal instead. The process of getting a personal loan is comparatively simpler and faster than getting a business loan. For example, RHB’s Easy-Pinjaman Ekspres boasts on-the-spot approvals if you meet all the requirements and have brought all the prerequisite documents. If you’re in a business that may require you to have fast cash on hand, the speed and ease of applying for a personal loan is very valuable.
Another factor that may sway you into getting a personal loan for your business are the requirements surrounding the application for a business loan. Although a business loan may have lower interest rates and larger financing amounts available, some banks only give out business loans to established companies who have been running for a couple of years, or even require some collateral for the loan. This makes obtaining a business loan not too friendly to people who are just starting out their business or want to do a simple side hustle to earn extra income on the side.
Personal loans are personal considerations
The financial wisdom of taking out a personal loan not only depends on a variety of factors such as the loan period, your credit score, and the interest rates offered to you by the bank. You should also take into account things like your income, spending habits, and long-term plans as well. Just like any other financial instrument, personal loans can be genuinely useful in certain situations. If you have decided to apply for a personal loan, take a look at the personal loans you can apply for on RinggitPlus and make an informed decision.