Despite our best efforts, there may come a time in our lives when we need to have access to a personal loan.
One of those times is now when many are carrying the burden of continuing to support our families while at the same time dealing with a slowing economy, growing financial hardships, and even emotional trauma.
Even if you started the year with a fully-funded emergency fund, you may be slowly dipping into it to pay for unexpected expenses related to the pandemic. Others may have started the year with a fully-funded emergency fund but is slow, or has already, ran out money. Of course, others were caught unawares and didn’t have an emergency fund, to begin with.
Whatever your reason may be, taking a personal loan is something that you should consider carefully and with much thought. Sure, you can have access to your neighborhood 5-6 lender who can give you the cash you need right away. But borrowing money without considering other factors other than speed may be catastrophic for you and may even add to your already heavy burden.
So, before you apply for a personal loan, I want you to read this guide on how to make personal loans work for you.
What is a Personal Loan?
Not having enough liquidity and the potential to need money suddenly is real at this time; I hope that you won’t experience an emergency that requires a lot of cash. But, in the event you need the money and don’t know where to turn to, one of your most viable and accessible options is to apply for a personal loan.
Simply, a personal loan is a loan that is granted for personal use. It is not tied to any specific item. Instead, it is linked to you, the borrower. Unlike a car loan or a home mortgage, most personal loans do not require a collateral. Approval will depend on, among other criteria, your salary, your employment history, and in some cases, your relationship with the lender.
Because there is typically no collateral involved, personal loans are considered unsecured loans. The interest rates for unsecured loans are usually higher than secured loans or loans that require collateral. Secured loans have lower interest rates because the creditor can seize the collateral in the event the borrower neglects to pay his balance.
On the flip side, through personal loans, borrowers who have no assets to use as collateral still have the opportunity to access credit. We can consider, though, that the borrowers are using their future incomes or salaries as the equivalent of collateral for the loan. Most personal loan providers in the Philippines require applicants to produce several months’ worth of payslips, and in some cases, even a Certificate of Employment from the Human Resource office, as proof of the borrower’s present (and future) income.
There are a lot of personal loan providers in the Philippines. It is up to you, the borrower, to shop around and ensure that you’re getting the best deals. Before you start looking, make sure to arm yourself with these terms:
- Principal — is the loan amount, aka, how much you want to borrow. For example, if you apply for a personal loan of Php 50,000, your principal is Php 50,000. The interest that you will pay will be calculated based on this amount.
- Interest — is the money you pay the creditor in exchange for borrowing money.
- APR — stands for annual percentage rate. This is the interest charged by the creditor annually. Comparing APRs is an excellent way to gauge the value of different personal loans, so make sure to take note of the APRs offered by the personal loan providers.
- Term — The number of months you have to repay the loan. Take note that the APR varies under different terms. Don’t assume that you will get the same APR if you change your term. Most of the time, you won’t.
Things to consider when taking out personal loans in the Philippines
Please you plunge ahead and sign the paperwork, make sure that you are aware of these considerations:
1. The time when people took out loans with no intention to pay it off AND not experiencing significant repercussions is no more. Not paying your loans (and other debt, for that matter) will have severe repercussions for you and your ability to access credit in the future.
All credit facilities are now required by law to report their clients’ basic credit data, including your credit and payment history, to the Credit Information Corporation (CIC).
The CIC is the body assigned by the Philippine government to collect our credit information, and they’re not joking around. In my post Credit History Reporting in the Philippines, I showed the report starting dates the credit providers are required to submit to the CIC.
Credit providers are required by the CIC to submit basic credit information from 2010-2011. Banks and other credit institutions in the Philippines are increasingly using the information provided by the CIC when assessing the creditworthiness of their clients.
What this means is that your access to financing and credit will depend on your payment history, including whether or not you pay your balance on time and in full. So, if you take out a personal loan, make sure that you can pay the monthly dues for the term you specified and be able to pay it in full.
2. Taking a personal loan is not a long-term solution to your problem. If you’re spending beyond your means or lost a source of income, a personal loan can temporarily alleviate your problems. However, the underlying problem is still there, looming in the background.
Consider a personal loan as a respite that will give you breathing space. It is not the solution to your problem.
3. Don’t rely on loans to fund expenses that you have ample time to prepare for. Sure, a personal loan can be an option when you have to, but it shouldn’t be your first choice.
Hopefully, you’re not planning on relying on personal loans for large but expected expenses.
4. It is not free money. Just because you can get approval for any number personal loans does not mean that you should take out all the loans you are qualified for. Remember that you still need to pay not only the principal but also the interest.
Personal loans in the Philippines – how to make them work for you?
Now that we have all these reminders out of the way, how do you make personal loans work for you? Here are my tips:
1. Take out a loan only if it’s essential
As mentioned earlier in this post, you can use a personal loan for any purpose. However, you should not use the flexibility of personal loans as justification to use it for non-essential spending.
As you can imagine, the flexibility and accessibility of personal loans can be beneficial under the right circumstance. Unfortunately, the flip side is also true. This flexibility and accessibility can be harmful to people who do not make financial choices carefully.
Of course, you define what you think is essential spending. But, as a reader of this blog (which is, after all, dedicated to personal finance), I hope I don’t have to remind you that loans are not for non-essential, non-emergency expenses like vacations and consumer products (but I’m still reminding you anyway).
What can be considered “essential” emergency expenses?
I’m not you, so I can’t define what is essential for you, but in general, the following expenses may justify taking out a personal loan:
- Medical or hospitalization expenses
- Paying off high(er)-interest debts or debt consolidation
- Living expenses when a crucial source of income is lost
- Home repair that’s currently out of your budget but needs to be done to avoid further deterioration. Ex: roof, plumbing, etc.
2. Shop around for the best deals and lowest interest rates
Just like when you’re looking for the best investments, you should do careful research and shop around for the best options available. Don’t accept the first offer you receive. Chances are, there are other, more favorable personal loan options waiting to be discovered.
One of the sites that you can visit for comparison shopping personal loans is Go Bear. Go Bear allows you to compare insurance, credit cards, and loans from different providers with just a couple of clicks. The website is easy to use and easy to understand, which will help you make wiser financial decisions with all the necessary information at your fingertips.
3. Only take out how much you need.
Don’t borrow more than you need. Get a loan only for the amount that you need, even if you’re eligible for more. Borrowing more than you need is financially irresponsible and can get you deeper into debt than you initially intended.
4. Do business with credit facilities that value transparency
Consider doing business only with loan providers that value transparency. Pick providers that will show you upfront the rates they offer and the fees you need to pay to take out a loan. Better if they can tell you how much in interest you will pay in total for the entire loan term.
For example, when you compare with Go Bear, the site will show you options based on your loan requirements, such as the amount you need, the term, and your monthly income. Go Bear will even show you how much money you will pay in total for interest, as well as the requirements you have to meet to be able to qualify for the loan. Neat, huh?
There may be times when we have to get into debt. Sometimes, life just happens. We get into circumstances we don’t expect, and we have to deal with it the best way we can.
Often, fast access to money may be vital in helping us deal with our essential, immediate expenses. However, we still have to use our heads when making quick financial decisions. A personal loan may help alleviate your problems; it can provide you with crucial breathing space if used wisely. But if used carelessly, it can add to your burden.
I hope that this post can help give you guidance and clarity when you decided to take out a personal loan in the Philippines.