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When to take out a personal loan

​​​​When to Take out a Personal Loan

​1 June 2018​

Life happens and when it does, it usually catches us off guard. For instance, when you get involved in a car accident, your entrepreneurial venture goes south or a loved one loses their job, there is usually not enough financial means to absorb the shock!

Emergencies are one consideration, but in our daily pursuit of comfortable living, we also struggle to accommodate everything, especially the big ticket items in our budgets.

Piet van der Walt, head of Sanlam Personal Loans says the role that well managed credit plays in building individual wealth is evident in the recent National Credit Regulator report which showed that there are 23.27 million credit active consumers in South African. Of concern though is that over 10 million of those have impaired records, says Van der Walt.

When is credit a sensible option?

There are times when taking out a personal loan is a good idea. In fact, it may sometimes be your only option, says Van der Walt. “While we don’t recommend getting into debt if you can help it, finding yourself strapped for cash when something unexpected happens, like an accident or unplanned medical expense, can often be quickly resolved by a personal loan – it could be a real life-saver in a crisis,” he says.

Needs vs. wants

Van der Walt says if acquired from a responsible lender, and used under the guidance of a professional financial adviser, a personal loan can be a helpful financial management tool. “It should never be used for bad debt – such as splurging on an overseas holiday or your daughter’s wedding. You should preferably only take out a personal loan to meet financial ‘needs’, not ‘wants’.”

Besides unplanned-for emergencies, personal loans can be used for:

  • Home improvements – which will increase the value of your property
  • Education – which is an investment in your or your children’s future
  • Buying a vehicle – where a car’s age, for example, makes obtaining vehicle finance difficult.

“Another important purpose for which a personal loan could be considered is debt consolidation – combining old short-term debts with varying terms and interest rates into one, simple monthly payment for a fixed rate and term. The idea is to work out a plan with your financial adviser to consolidate your debt in such a way that your monthly debt reduction forms part of a well-considered budget which still gives you the cash flow you need.”

Van der Walt says it is never a good idea to cancel life policies or risk cover, or to stop contributing to retirement savings, when you hit a financial obstacle. “Rather use a personal loan which you can pay back over a specific, short-term period without leaving you and your family financially unprotected. With a Sanlam Personal Loan for instance, you can even increase the monthly payments to pay back the loan sooner – there are no penalties for doing this. Unfortunately not all providers allow this so people should check their loan terms carefully.”

Credit card vs. personal loan

A personal loan is also often preferable to relying on the plastic in your wallet to get you out of a financial fix. The total costs associated with using a credit card, such as annual costs, interest and transactional fees, are sometimes higher than those incurred when you take out a personal loan. A credit card can be used indefinitely, so unless you are highly disciplined financially, you won’t necessarily reduce your debt levels.

Van der Walt warns against taking out a personal loan from unscrupulous loan sharks or micro-lenders who tend to ask maximum interest rates over the short term. “It is better to choose a reputable lender with personalised, competitive interest rates than to use a dubious lender with high repayments.”

Getting the right financial advice from the start is crucial. If you are desperate and apply for personal loans at different creditors, this will go on your credit record and may create the impression that you are in financial trouble and therefore a credit risk.

“If used responsibly, however, a personal loan could help you build a good credit record which could be to your advantage in future,” Van der Walt concludes.