Understanding personal loans: When should you use it?

Despite popular belief, personal loans are not just for emergencies meant as a last resort. In fact, with appropriate use, they can help you navigate many a gnarly financial situations. 

Here are the top six reasons to apply for a personal loan:

1. FOR PLANNING A WEDDING

Instead of maxing out your credit cards keeping up with a runaway wedding budget, or feeling resentful and deprived over a lack of funds, why not discuss how to meet the expenses with a personal loan instead?

Plan your budget together carefully, and choose a loan amount and payment period that is comfortable for you. That way, you can have your dream wedding, and a plan to deal with the financial fallout after. 

2. FOR PAYING OFF BILLS OR CREDIT CARD DEBT

You've been paying and paying but your bills just never seem to end. Maybe high interest rates are the culprit. Using an appropriate personal loan will let you break the cycle of unending bills.

First, work out how much you owe, and how much you are paying each month in bills. Then, look for a loan to pay off all your debt, and choose a tenure and repayment amount that you can comfortably cope with.

What's left is simply to pay off your personal loan by sticking to the monthly payment schedule. 

3. FOR HOME RENOVATION OR RELOCATION

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Buying a new home, or moving into one, inevitably means requiring a sum of money for various expenses, from moving to renovations to appliance and furniture repairs and replacements.

Sure, you could use your savings, or max out your credit card by putting all your furnishings on instalment payment plans. But what if you run into an emergency while you have no savings and maxed out credit?  

A far better solution would be to look for a renovation loan, which comes with much lower interest rates (but also more requirements, such as an appointed ID firm or contractor, and proof of work.)

Some renovation loan packages also provide a secondary loan you can use for furniture. And, then, if you have any outlying amounts to cover, you can apply for a personal loan to make up for the shortfall. 

4. FOR MEDICAL EMERGENCIES

The cost of medical care in Singapore is expensive, and Medisave only allows you to claim up to a limit for most conditions and procedures.

Even with insurance, you can find yourself staring down a hospital bill in the thousands in the event of an emergency. 

Taking out a personal loan is a fuss-free way to meet your medical expenses. More importantly, the fixed loan period and monthly amount lets you pay off your debt at a steady rate with no surprises, freeing you to focus on getting well or taking care of your loved ones. 

5. FOR INVESTING AND GROWING YOUR WEALTH

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Borrowing money to invest is not automatically a bad thing to be avoided. Nor does it need to be unnecessarily complicated, attempted only by financial daredevils. All you have to work out is the interest paid, versus interest earned. 

For example, let's say you're interested in a short-term investment opportunity that gives you 8 per cent in returns over 5 years. However, the minimum investment amount is $20,000 (which would give you $1,600 in returns).

You're short by $5,000, which you decide to cover using a personal loan over 3 years. Using our personal loan calculator, we find that the interest for the loan amounts to $508. With the profit of $1,600 from your investment, you're still ahead by $1,092. 

This seems like a small amount but seasoned investors know that making small gains is the way to riches, thanks to the power of compounding interest. 

6. FOR UNFORESEEN SITUATIONS INCLUDING FUNERALS OR DIVORCES 

Sometimes life happens, sending even the best laid plans into a tizzy. Funerals and divorces are nerve-wracking emotional roller-coasters, and it can be easy to react with rash decisions, especially financial ones. 

To limit this, consider applying for a personal loan to deal with final expenses or legal fees. This will help enforce a budget on proceedings, preventing things from getting out of hand.

Afterwards, the steady repayment process can help with closure, without inadvertently causing hardship or bringing up bad blood in case of divorces. 

This article was first published in SingSaver.com.sg.