Disclaimer: This is a sponsored post by OCBC, and contains information about their personal loans. You are STRONGLY advised to do your own research before committing to a personal loan.
Of all the loans to take out there, personal loans are perhaps the hardest to understand. I mean, just look at the terminology.
Housing loans are for houses, and generally everyone can agree they are a necessity. Education loans are for education. Pretty self-explanatory.
Personal loans…. they are just really vague.
For that reason, many people stay away from them. After all, it’s very natural to fear unnecessary debt. Carrying more debt than you can afford can affect your mental health.
It gives you that nagging feeling that you are still chained to your job. It’s a monthly reminder that you’re not financially free.
But hear us out – personal loans, used in specific scenarios, can be extremely helpful.
Here are four of them that we think make sense:
#1 Prevent other debts from taking over your life
Let’s start off with the most no-brainer of them all – the consolidation of high-interest credit card debts. Otherwise known as a balance transfer.
If you’re helping a loved one tackle nasty credit card debt with super high interest rates, or are helping with a family member deal with loan sharks because of a gambling addiction (40% interest rate! Ridiculous!) – then a personal loan is the far lesser of all the evils.
That said, what is more important is that you recognise that debt is only a symptom of an underlying problem – for example, gambling or shopping addictions. Without tackling this, chances are that high interest debt will find its way back into your life.
#2 A long-term investment on your education
The best investment will always be yourself. Period. And in today’s world, education is getting more and more important.
That said, while all jobs can be considered important to society, when examined through a personal finance lens, some forms of education are judged more favourably than others.
This might not be the last word on whether you choose to get educated, but should be one of the major ones.
Now, we are no experts on degrees, but everyone should be asking themselves these questions before they commit:
Will your current or future employer care about your qualifications? A S$100,000 MBA is wonderful. But will it make you a better candidate for your next job? Different industries value different things.
What is the ROI? A degree that takes 2-4 years to break even is fair. But if you’re still paying off your degree after 8 years, it’s harder to justify.
Are there more affordable alternatives? Can the degree be done locally? If it’s overseas, do the benefits outweigh the costs? For example, you can pursue an INSEAD Master Programme in Singapore, but will going to the Europe Campus help you learn significantly better?
(But wait, aren’t there already education loans? But the fact is, the world is full of different educational pathways nowadays, and not all of them can be funded through a conventional education loan.)
#3 To ease personal finances as a business owner
We have mentioned before that starting a business is often a big risk. Some people have wealthy parents to give them that safety net, and that’s fine.
For those without that safety net, life can be rough. Not all businesses break even within the first year, and sometimes entrepreneurs can go for long periods of time without any income.
That’s when you may need some help with your personal finances, and personal loans can help to pay the bills and keep the lights on at home. (That said, we still advocate that you have some emergency funds before starting a business.)
Most businesses will take up immense capital/time/effort/energy, so the last thing you want to deal with when you’re swamped with complaints from customers and clients is a cash flow problem at home.
If this sounds scary and intimidating, that’s because it is. But there’s a reason why the world’s richest people are all business owners – because they were willing to take risks.
#4 Maintain your liquidity when it comes to big purchases
Let’s say you have $20,000 in emergency funds, and need to spend $20,000 for furniture in your new flat. In a scenario like this, we’d take a loan simply to make sure there’s enough money to tide us through in case a big emergency happens, instead of depleting our emergency funds.
(Of course, this applies only if you’re still earning income. If you’re not, you might wanna put off that big purchase altogether.)
The other scenario is of course, if we didn’t have emergency funds and something expensive and unexpected happened. In this scenario, we’d take a loan, go into austerity mode, pay it off asap, then build up our emergency fund so we’d never have to take up a loan again.
Here’s what you should AVOID taking loans for:
A Wedding Beyond Your Means. If you’re taking a wedding loan to maintain your liquidity (see above), that’s completely fine.
That said, we’ve read many stories where couples go way beyond their means to have a ‘dream wedding’ and end up in debt instead, so we tend to err on the side of caution for this. A lot of the overspending happens because people get (understandably) emotional about weddings. When this happens, they find reasons to justify more and more costs.
As a general guideline, don’t borrow more than you already have in cash for your wedding.
Downpayment for a house. As we’ve said many times before, a home is a HUGE decision that will have immense financial impact on your life. Spending too much on your home will limit your investment potential, and affect your ability to plan for the future.
This is why the downpayment has to be paid in cash and not with a loan, and if you can’t afford it… you most certainly cannot afford your home.
Investments in the stock market. For most people, taking personal loans to do this is generally a poor decision. Any possible gains you can make from investing will definitely be amplified, no doubt. But any losses will also be magnified. Here’s our thinking.
If you had to borrow money to invest, you probably don’t have a lot of holding power. If you don’t have a lot of holding power, you won’t be able to make rational decisions with investments (?) you don’t exactly own.
Given that the stock market is a volatile investment vehicle, we think the vast majority of investing beginners who read this blog (ourselves included) lack the commitment, temperament, luck and skill to pull this off successfully – to be blunt, we should stick to investing with money we already have instead.
Holiday. Holidays are earned. Simple as that. You don’t spend what you don’t have.
Loans amplify your choices – so be careful
If what we’ve mentioned so far sounds pretty straightforward, that’s because it is.
There’s nothing complicated about debt, to be honest. Instead of instinctively avoiding ‘borrowing money’, consider loans as a tool in your arsenal to be used with discretion.
Here’s an analogy: Taking loans is a lot like injecting yourself with Captain America’s super soldier serum. It amplifies your good decisions, but also exacerbates your bad ones.
What does that mean for the average salaryman? Put it simply, before you run out there and commit to a loan, build your financial character.
Stay woke, salaryman.
A MESSAGE FROM OUR SPONSOR:
If you have a valid reason to take on a loan, do consider taking OCBC’s Personal Loans. That said, remember to always borrow responsibly and do your own research before you commit!