Personal Loans and Your Purse Strings

Aug 5, 2014 Blog  Personal Finance

How do you know whether personal loans are good idea and what other alternatives should you consider?

These are some of the questions you should ask yourself when you need to get your hands on some cash and would like to do so without laying a debt trap for your future self.

The Problem:

I had my first run-in with personal loans and all of its complicated bells and whistles last year, when the company I worked for took a hit and had to ‘trim the fat’. What this meant, in practical terms, was that they were cutting my position in half, along with my salary. Unfortunately neither my landlord nor my various other creditors were feeling particularly generous, which meant that while I was on the hunt for another job I would have to keep up with my bills.

Up until this point I had been living pay check to pay check, which meant I was sans the luxury of a financial cushion, as well as being way too stubborn to ask my parents to tide me over. Cue personal loans.

Things You Should Know:

    1. Banks would LOVE to give you a personal, unsecured loan. Unlike a secured loan, which is backed by some type of asset or collateral (e.g. property), an unsecured loan means the bank can take legal action against you if you fail to pay your monthly instalments. They love handing out these loans because the interest they make off it is quite spectacular. In fact, my bank is so amped to give me another loan that they have added advertising to my internet banking platform and call me regularly to remind me that further debt is a mere click away.
    2. The interest on personal loans is pretty ridiculous. Although it depends largely on your income, credit score and payment history, the one thing you can be assured of is that the interest on your personal loan will seem a little bit like a joke. If I hadn’t really needed the cash at the time I would have snickered in the loan officer’s face and hightailed it straight out of there.

Taking Action:

In my case things worked out relatively well. I only needed R10 000 to get through the financial rough patch, so a personal loan was a good option. Financial advisors will tell you that these kinds of loans are best used in case of an emergency (such as mine), to purchase fixed, appreciating assets (e.g. a home or office space) or in cases where it would result in overall savings (e.g. paying off your credit card in cases where the interest on loan repayments would be less than paying off your credit card itself).

But, Wait… There Is Another Way

But what if you require a sizable amount to, say, start up a business? Are there other alternatives? It turns out there is! One of the more interesting options out there is peer-to-peer lending. This lending model connects individuals who need funding with investors looking for interesting investment opportunities.

For borrowers this kind of transaction normally means more flexible rates and quicker turnaround times, while lenders get diversified returns across multiple platforms. Some P2P platforms can even be used to facilitate loans between family members and friends – allowing people to help out their nearest and dearest without the unpleasantness that could potentially result from non-payment later along the line.

Moving Forward:

Going into debt is a decision that should be carefully researched and considered. No matter what your financial requirements may be, it’s always a good idea to do your homework and discuss it with a trusted adviser.

Don’t fall into the trap of thinking personal loans from the bank are the only choice – think outside of the box and you may be surprised at the interesting options out there.

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