Wednesday, November 7, 2012

How to make use of your loans wisely

If you have regular income or if you have an asset, getting a personal loan should not be a problem, subject to the standard creditworthiness of the would-be borrower.

It is important, however, to know why you need that loan and what you are going to do with it.

You take up a loan for many reasons and elaborating on these would answer the question about the sort of things you should spend your loan on.

The two most common reasons are:
(a) To bridge your finance over a tight time until the next expected and confirmed income
(b) To consolidate various loans

You may suddenly have a number of obligations - to meet and need urgent cash and you are confident that your end-of-year bonus would be more than adequate to cover the loan.

It might also be that you have just lost your old job but have already quickly got a new one and there is an income gap till you start working again. The loan would then be used for living expenses during the gap.

Or you have a number of smaller loans, such as credit card bills and loans, to service and wish to clear all these first and have just one large loan to take care of.

Specifically, some of the reasons for taking up a loan include funding a wedding, paying for education, meeting unexpected medical bills, going for a much overdue holiday and repairing a car.

Sometimes, a wedding has to be held at a particular date. You cannot postpone the tertiary education of your children. A holiday is for recharging your battery. For certain types of work, a car is indispensable. If it has to be repaired, it has to be repaired. And even with insurance, medical bills can leave a hole in our budget.

A loan buys you some time and space to relook and rework your monthly expenses.

For all loans, the fundamental operating principle is: Know what you are doing and don't live beyond your means. The factors to consider would include: current income, current expenditure, future prospects and existing debts.

Understand the terms of the loan. While a longer loan term will result in lower payments, you will end up paying more for the loan over the life of it due to the amount of interest.

With that in mind, borrow only the amount you need for your specific purpose and pay it back as quickly as you can. Make sure the set monthly payment is something within your reach on a regular basis so you are not likely to default on the loan.

Apart from the use-at-your-own-will lump sum personal loans, there is also the specific loan. A car loan is one. This is so common that the lender and the borrower do not even see each other.

Everything is arranged by the car seller.

The other important loan that Singaporeans are familiar with would be the renovation loan.

These are for such renovations such as change in electrical fittings, extensive repairs, room remodelling, extending your housefront and so on. Designers, contractors, site inspectors etc are involved. Depending on your credit rating, you can get up to six times your salary and usually no more than $30,000.

The faster you settle the loan the better, as obviously you would then be paying less interest. A renovation loan is effectively borrowing money for consumption, and you want to repay the debt quickly. Repayment period is one year to five years.

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