Companies and businesses have often carried out this lending and borrowing activity. However, in recent times, individuals have begun to take up personal loans, plus the pandemic situation has caused people’s pockets to get thinner.
Capital owners are aware of the needs of this community and compete to provide loan facilities with various ease of approval ranging from eliminating the need for collateral to applying for loans online with approval in a matter of hours.
From so many borrowers, the reasons for taking loans also vary.
Here are some common reasons why people take personal loans.
1. Paying Debt
For those who are already in debt to several parties, managing financial flows and maintaining timely payments is a burden, especially if some of the debts taken have high interest rates.
Personal loans are taken as part of a debt consolidation strategy by taking out one main loan with a lower interest rate to pay off another debt with a higher interest rate. Then slowly repay the main loan so that the financial situation becomes lighter and easier to manage.
2. Meet Monthly Needs (Payday Loan)
Financial planning for monthly needs can be disrupted due to a sudden decrease in income or a booming need for expenses. With this situation, the monthly allocation of funds may run out before payday. If the situation is prolonged, it often requires an injection of funds from a loan.
Payday Loan provides solutions for short-term loans as a bridge when this happens. However, with a fairly high average interest rate and a very short tenor, personal loans are usually an alternative because they are lighter and the payments are easy to arrange. However, personal loans often require a more complicated process and a longer approval process than Payday Loans which are designed to be an instant solution.
3. Home Renovation
From the damage caused by age, natural conditions, additional facilities, to the addition of family members, the houses we live in need renovations, both small and large.
Personal loans are an attractive alternative as a source of funds if the homeowner does not have sufficient equity in his house. Personal loans have the advantage that loans can be obtained without collateral, and from this point of view the risk is lighter.
4. Emergency Needs
If you have an emergency, such as paying medical bills, it is a common reason to take out a personal loan, especially if the doctor or hospital demands full payment. Common medical treatments that may require the use of personal loans include dental care, cosmetic surgery, fertility treatment, to major surgical procedures or ongoing treatments that can cost tens to hundreds of millions. Personal loans can help cope with these sudden expenses.
5. Wedding Expenses
The cost of a simple wedding reception can run into the tens of millions. For couples who don’t have that much cash, personal loans can allow them to cover their wedding expenses now and pay them off later.
These loans can be used for large items such as venues and wedding dresses, as well as smaller expenses such as flowers, photography, cakes and wedding coordinators.
You can also consider paying for the engagement ring with a personal loan. Depending on the type of ring you get, an engagement ring could easily cost several months of your paycheck. If you don’t want to drain your savings, consider a personal loan to help make your engagement and wedding exactly the way you dreamed it would be.
6. Buying a Vehicle
Vehicles have become a semi-essential necessity that can support income and reduce expenses. However, the cost needed to buy a car or at least a motorbike can at least be equivalent to a month’s salary.
For those of you who don’t have savings for this, a vehicle ownership loan can be a way out. However, if your credit application is rejected, you can take advantage of a personal loan to buy the vehicle you want with easy monthly payments.
7. Business/Business Cashflow
Payments from clients can be delayed especially in unfavorable economic conditions. Meanwhile, operational costs must be paid regularly. You may have set aside funds to pay employee salaries, but bonuses and THR are often overlooked and depend on a stable income.
If a loan in the name of the company takes a long time to be approved, a personal loan in the name of the owner or shareholder can be a float to ensure the company’s performance is maintained and the books look healthy.
Is a personal loan suitable for you?
If you need an immediate flow of cash to pay for necessary expenses, a personal loan may be a good option. Interest rates for personal loans are usually lower than for credit cards, especially if you have a good credit history.
Of course, you should always weigh the benefits against the drawbacks. After all, taking out a personal loan means taking on debt, and you should be prepared to pay that debt over several years. If you don’t have a monthly budget for principal plus interest payments, reconsider the amount you need to borrow or how you borrow.
When is a personal loan a bad alternative
While a personal loan is a useful tool for financing hefty or unexpected expenses, there are situations where a personal loan may not be the best option. Before applying, consider your financial situation and reasons for taking out a loan. The worse your credit history, the higher your interest rate.
Personal loans may also not make sense if you can make purchases with better types of loans, such as real estate and vehicles. Banks often offer special programs for the purchase of such assets, for example with a mortgage. In addition to interest rates, additional facilities and features included in the program can help you ease and manage the monthly payments. Consider the reasons why you are applying for a personal loan and if you would be better off with a loan designed specifically for your purchase purpose.
Lastly, if you have a tight monthly budget, a personal loan may not be optimal for you. You may find that your personal loan payments will be higher than the combined minimum payments of the debt you are trying to pay. This has the potential to leave you with more debt and a cashflow crunch. Make calculations carefully before making a decision.