Personal loans are widely regarded as one of the most useful financial tools out there and for good measure. No matter what you need the money for, this collateral-less and flexible financing option can work to address almost any kind of financial requirement.
But, for all its popularity, there are times when taking a personal loan might not make sense from a financial point of view. From creating new debt to adding to your existing pile of woes, getting a personal loan can possibly do more harm than good, especially when you’re not financially aware.
So, without further ado, let’s take a look at 6 common scenarios when getting a personal loan may not be a good idea.
1. Lavish wedding
Weddings are one of the most special occasions of our lives, and people tend to leave no stone unturned to ensure that it’s marked with a grand celebration. However, many depend on personal loans to fund their dream wedding, which may turn out to be a bad idea.
Ideally, one should have proper savings in place to minimise dependence on any kind of loan to bear the wedding expenses. Simply because the beautiful journey with your spouse should not begin with high-interest debt; rather efforts should be made to consolidate your family’s finances to prepare for bigger future commitments like a new house, new car, kid’s education, etc.
And weddings are not exactly cheap in Malaysia. Do check out our blog for useful insights on the estimated cost of a wedding in Malaysia.
So the crucial pointer here is instead of depending on a personal loan, you should rather walk the extra mile to cut costs on wedding celebrations. From choosing wedding packages to slashing the guest list, there are plenty of ways how you can do that. Don’t forget to read our blog 10 Simple Ways You Can Save Money on Your Wedding for some helpful suggestions.
2. Vehicle financing
As personal loans are unsecured by nature, they carry a higher lending risk, which is why the interest rate is high. When you compare such a loan with an auto loan, you’ll notice a comparatively lower interest rate.
This is because auto loans are secured by a collateral – your car. This, in turn, means a lower lending risk. So, remember to check out different auto loan offers before you consider getting personal financing to buy any vehicle.
3. Luxury vacation
Vacations can be expensive, depending on where you travel to and for how long, where you stay, how you commute locally, etc. And if you’re planning to pay for your holiday with a personal loan, you’re only adding to your existing woes. Much like a lavish wedding, a luxury holiday isn’t a necessary expense.
The best way to go about a vacation is to plan it according to your budget – what you can pay out of your pocket. Anything more is really not advisable. So, if you’re planning to travel, make sure you start setting aside money for it well in advance in order to prevent reliance on a personal loan to fund it.
Also, a little research will tell you how you can save costs while you’re on a trip. For those who want to travel within Malaysia, here are some ways you can have fun without burning a hole in your pocket in Sarawak, Penang, Kota Kinabalu, Kuching, Langkawi and Malacca.
4. Daily expenses
You may not be in good financial shape if you’re considering going for a personal loan to fund daily expenses. The interest you need to payback along with the principal amount that you borrow can impact your finances.
To start with, do everything in your capacity to cut down on costs so that even if you need to take a loan, you can do with a smaller amount that you can repay with ease.
Must read: 5 Useful Tips to Become Debt-Free
Market-driven investment instruments like mutual funds and stocks usually carry higher risk. So, you run the risk of losing money if the market takes a plunge. And if you take out a personal loan for such investments, you risk being in a large amount of debt too.
Even funding lower-risk investments like fixed deposits with a personal loan doesn’t make financial sense. Low-risk investment tools generally fetch guaranteed but lower returns which may not even be enough to offset the interest you owe on your personal loan.
Before you start your investment journey, take complete stock of where you stand financially by reading our blog How Investment-Ready Are You?. Yes, you should invest to grow your wealth, eventually in multiple low and high-risk instruments to remain afloat, but only when you can afford them — and ideally not with borrowed money.
6. Medical expenses
Sudden medical emergencies may also bleed your finances, apart from inflicting physical and psychological discomfort, if you’re not prepared to tackle them. And yes, a personal loan may come to the urgent rescue, but it may also add to your debt further sinking your finances.
To safeguard your financial interests in the face of a medical emergency, we suggest:
- Have in place a sizeable cash emergency fund in a savings account which should have at least 3-6 months’ of your average expenses. Read our blog to know why you need it now, and how to build one.
- Consider getting a health insurance policy to fund hospitalisation expenses. Here are 5 top health insurance plans in Malaysia that you must check out.
- Take good care of your health to minimise chances of major health complications (which may also result in draining of hard-earned money) in the future. Here are 8 smart things you can do now to avoid major health problems later.
To sum things up, borrowing money may not be the best idea when you’re financially unaware and don’t know what it takes to pay it all back. While a personal loan can seem like the easy route in most cases, give proper thought how will you be able to address the added debt before you go for it.
So the key lies in going for a personal loan only when other means to tackle the necessity have been exhausted, and you have complete clarity on the roadmap to repayment, i.e. how much loan amount is exactly required, what’s the effective interest rate applicable, how affordable will be the monthly instalments, how easily can the loan be pre-closed in future, so on and so forth.
Equally important is to compare all available personal loan options before zeroing in on an option that best suits your requirements. To make this easier, here are some of the top personal loan options in Malaysia right now.
And if you’re on the lookout for a personal loan, our ongoing promotion may interest you. APPLY NOW for Alliance Cashfirst Personal Loan, Standard Chartered CashOne Personal Loan, and Citi Personal Loan, right here on BBazaar, and get a Tesco voucher worth RM50 on loan disbursal. T&Cs apply.
You can also apply for Kuwait Finance House Murabahah Personal Financing-i and get a Smart Bracelet worth RM200, absolutely free, upon approval and disbursement of the facility. T&Cs apply.
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