Have people learnt anything from past financial crashes? If you look at many loan products out there that promote the ease of getting money quickly even without the proof of having a steady income to repay it, you may get a sense of déjà vu.
And while some sectors like mortgage lending, especially in the United States, where the 2007 housing crash originated have been strictly regulated since to avoid irresponsible lending, other lending sectors don’t seem to attract the same level of scrutiny.
In the UAE, the situation may be different, but it still your duty, as a consumer, not to be carried away with taking credit offers that puts your above and beyond your means. To determine whether taking a personal loan is the right move for you or not, you must look into the following points.
Your purpose
Common wisdom says that you should not take a loan unless you need it. That is not free money; it comes coupled with high interest, fees and penalties that only get higher if you default on your loan. That doesn’t mean you should never take a personal loan. In fact, in some cases, taking a personal loan is a smart choice. For example, if you know that a particular event — medical expenses, baby arrival, wedding, etc — is coming up and you will need a significant amount of cash, taking a personal loan can help you on several levels.
First, you should be able to budget and stick to a budget for this event, which is much better than just taking it one day at a time with open-ended spending on your credit cards. Second, interest rates on personal loans are typically well below those of credit cards, so planning ahead can save you a bunch.
Finally, you will still have your credit cards — and your credit standing — intact, as long as you are not tempted to use them as well and rack up more expenses.
Your ability to repay
Forget about any argument you’d make with a lender to get a personal loan, be realistic about your ability to repay the loan. If you have been running pay cheque to pay cheque without much to spare, you probably will struggle to make the monthly payment.
Additionally, many people take loans to deal with a recurring situation like paying a rent check or school tuition. If you’d spread the payment over several months or a year to make it affordable, how will you deal with the next payment? Debt isn’t a solution for recurring payments unless you expect your financial situation to improve dramatically and allow you to meet future obligations.
To determine whether you will be able to repay your loan, ask for an estimate of the monthly payment and see what can be trimmed in your expenses to allow for this payment. In addition, think about the worst-case scenario, like losing your job. Will you have some sort of insurance that covers your remaining payments? If yes, how much this insurance is costing you. And what will happen if you default? These questions must be answered before you sign on the dotted line.
Think of alternatives
Don’t rush to take a personal loan because there could be better financing options out there. For example, students and parents may receive financing from schools and universities. Some retailers may offer no-interest financing on some of their products or services, and you may be able to tap into your home equity or your retirement funds for some cash.
The point is: Don’t be carried away with the personal-loan offers. They might be easy to get, and the temptation of having money in the bank quickly is hard to resist, but they are not necessarily the least expensive. In your search for alternatives, look at your savings, investments and real estate, because all of these could pay for some home renovations, medical trip or a child’s tuition without the high cost of personal loans.
