It may sound strange but making use of a personal loan in a prudent manner can sometimes help you to improve your personal financial situation. In fact, there are some who feel that one should only take up personal loan as a method of last resort. However, there are certain situations where using personal loans may bring you advantages as compared to using other forms of credit. Here’s a look at how personal loans can sometimes help you improve your financial situation:
If you currently have a debt, such as those on a credit card where you need to service a high interest rate, using a personal loan to pay off that outstanding debt may be a way to reduce your debt at a faster rate. Why? Because personal loans typically charge a lower interest rate than credit card, it can reduce the total amount of debt you are paying if you use a lower interest loan to pay your higher interest outstanding debt.
Do you find that you are short of money 3 weeks into the month and you’ve got bills to pay before your paycheck comes in the next week? If that’s the case, you might have a cashflow problem.
A cashflow problem is quite common, especially on months where you might have a huge bill to pay, such as settling the renovation bill at home or a large medical bill. This is when a personal loan can give you some breathing space to settle the debt at hand, while you slowly repay in a number of instalment payments.
It is a common misconception that only low-income earners take up loan because they lack money. Think about it, why do rich people take out mortgage loans when they can pay off their homes with the cash they have?
The answer is leverage.
Leverage is the use of borrowed capital for an investment, expecting the profits made to be greater than the interest payable. For instance, if you are able to take out a loan at 6% interest rates and invest it in something that gives you 8% returns a year, then you are using leverage to help you make that 2% profit.
However, leverage has to be used with caution as it is often difficult for an investment to earn high returns without great risk. Access your investment carefully before using loans as a way to help you increase leverage.
There are certain situations where it is more advantageous to use credit cards, and others where is better to use a personal loan.
The danger with credit cards is that it is a revolving debt – you can always charge more at any time up to your credit limit, keeping you stuck in the debt cycle. With a personal loan, it is a fixed sum of money that you have borrowed and you can’t borrow more without completing a new loan application. This means that it will be less tempting than a credit card that may make you spend more unnecessarily.
While personal loans are helpful in certain situations, taking excessive loans can serve more harm than good and will increase your debt burden in the long run. Remember to always think carefully before taking on more debt and be sure that you can make the repayments. Not being able to pay