When used responsibly, a personal loan can help you save money and improve upon your life. Here’s how.
There’s a reason even rich people use loans. It’s about leverage. Liquidity. And dozens of other financial buzzwords that “experts” get overpaid just to explain. Well, forget that noise–here’s how the whole loan business can work to help you, in plain English:
What is a Personal Loan?
If you want to redecorate your house, you get a home renovation loan. If you want to pay for your university fees, you get an education loan. If you want a car… well, you get how this works. Most loans are tied to a specific purpose. You can’t take a car loan and attempt to spend the loan money on new shoes, because the bank will send the money directly to the merchant.
With a personal loan however, you don’t need a specific reason.
And when you have raw cash that you can spend any way you need, there are plenty of ways to spin it to your advantage.
1. Lower the Interest Rate of Your Existing Debt
One way to save money with a loan is to absorb high interest loans with lower interest ones. For example, say you owe S$10,000, on a loan with an interest rate of 12%.
You could then find a personal loan with 6% interest, and borrow $10,000 on it to pay off your higher interest loan. This results in long term savings, as you would be paying only half the interest.
With credit card debt, you can usually manage the same through a balance transfer. The interest rate might be even lower than a personal loan. When that’s not an option however, you can try to fall back on personal loans.
Whatever the case, don’t leave your debt to snowball.
2. Use it as Capital for Side-Income / Side-Business
Want to start a blog shop? Maybe buy some camera equipment to use or rent out? A personal loan is a good way to do it.
If you try to take a business loan, you usually need a track record of two to three years “in the black” (i.e. not losing money) in order to get approval. There are also certain requirements (e.g. business registration issues) that you may not be ready for yet.
Don’t let any of that stop you. When you use an affordable personal loan to invest in your side-business, what you earn will more than pay for the loan itself. For example, a typical S$4,000 personal loan, with a one-year loan tenure, could have repayments as low as under $400 a month.
This is not an exceptionally high revenue to expect from a side-business, which could largely pay for its own loan after a year.
3. Upgrade Your Skills / Qualifications
Using the loan to pay for skills courses is an obvious example. However, have you thought of using the loan to give yourself time to study?
For example, you could use the loan to take a month or two of unpaid leave, during which you can focus on your skills upgrading. Having this free time gives you opportunities to draw up plans (e.g. write proposals and action plans based on your new skills and refine them), or to experiment with them.
There may be a short term loss because you have to repay the loan–but if it results in a promotion, you effectively make thousands over the years in your job. For example, you take a $5,000 raise to do this.
A simple $300 raise from your new skills or knowledge is about S$3,600 extra a year. By the time you have been working for three years, you would have gotten S$10,800 extra–more than twice the amount of the original loan.
Don’t Be Afraid of Using Loans
Loans are tool, much like a hammer or kitchen knife. If you use them carelessly, they can indeed hurt you. But it would be difficult to go through life without ever using these tools, and sometimes failing to use them will cost you even more time and money.
Finance would be simple if it was a case of total abstinence–avoiding the use of debt entirely. But this simply isn’t realistic: at some point you will almost certainly need a loan, be it for a house, car or education.
If you learn to use it responsibly and to your benefit, a loan can improve your life situation. Follow us on Facebook for more details.
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