The notion of taking up a personal loan may sound daunting, but personal loans are in fact one of the most accessible and useful financial products that can help you in various ways. One of the ways it can help you is to reduce your liabilities – even make you money – in the long run.
Personal Loans Can Reduce Debt Quickly
A personal loan can help you to save money if it offers a lower interest rate than your current liabilities. With lower interest rates, monthly instalments payable are reduced, and this will in turn reduce your debt and liabilities in the long run. However, this must be done prudently – before agreeing to take up any loan, always carefully read the Terms and Conditions (as well as all the other fine print) relating to the loan. Look out for the terms regarding late payments, and make backup plans to reduce the chances of unnecessary fines or late payment penalties.
Personal Loans Improves Your Cash flow and Free Up Your Current Cash For Other Uses
Do not underestimate the time-value of money; when executed well, you can make your money work for you. Let us show you how powerful the time-value of money can be with an example:
Consider a 15-year-old adolescent with RM10,000 right now. Assuming that the adolescent invests in a stock that gives him 10% returns annually;
In the end of the first year, the kid will have:
RM10,000 x 1.1 = RM11,000
Assuming that the stock gains remain invested, at the end of the second year the kid will have:
RM10,000 x 1.1 x 1.1 (or 1.12) = RM12,100 (compounding returns)
So at the end of the 15th year, the kid will have:
RM10,000 x 1.115 = RM41,722 (plus whatever dividends the company declares during that time)
Compared to someone who does nothing with the RM10,000, the adolescent is now four times richer. Using the same concept, you can use your current money to help you earn money and pay off (or at least reduce) current liabilities with a personal loan (perhaps secured with monies that are maybe held in fixed deposits or otherwise not very liquid assets).
However, bear in mind that if the adolescent had borrowed that original RM10,000 secured by his savings, he must pay back the interest owing on the principal, as well as the principal sum itself. If the interest is 6% p.a., and the prevailing fixed deposit (FD) rate is 4% p.a., the adolescent would have done just as well to forget about the loan and keep his money in the FD. As with everything, always check your sums first.
Use The Additional Capital You Have From The Personal Loan As Leverage
With the additional capital, you can use them as leverage to invest and subsequently repay the loan amount and the interest.
Imagine the following situation: you borrow RM12,000 repayable at 6% per annum. If you invest this RM12,000 in stocks and indices (such as the FTSE Bursa Malaysia KLCI ETF) that give dividends of 8% per annum, you can pay back the 6% loan and still earn the 2% returns from the KLCI at absolutely no cost. Of course, this requires careful study on your part to choose the right portfolio of stocks and indices, but the idea is a sound one. Hence, when planned properly, you can also “use” the personal loan to earn more money to pay off/reduce debts, to pay for your children’s education or for your own vacation.
Debt Consolidation Through a Personal Loan
You may have a lot of different credit cards and may owe different amounts to different credit card companies. By taking a personal loan, you can consolidate your credit card debt into one single debt, and this normally comes with reduced interest rates when compared to owing on several different credit cards.
Another good reason to consolidate your debt is that you will not forget to pay a certain credit card, which allows you to avoid the problem of late payment charges. This will also to help prevent more unnecessary spending and in the long run, help you to reduce your liabilities. But do consider reducing the number of credit cards you have after taking out the loan; this will also help reduce your chances of getting into the same situation again.
A word of caution – personal loans cut both ways
While personal loans are helpful, taking excessive loans combined with bad financial discipline may serve more harm than good, and will increase your debt burden in the long run, rather than reduce them (which was arguably the whole point in the first place). Only by making calculated risks, and being aware of your financial abilities, can you make prudent use of such loans. Remember; personal loans are double-edged swords – they can clear your debt, but overwhelm you with debt as well. Plan well in advance and start managing your liabilities better through them.
Disclaimer: While personal loans may sound very attractive here, it may not be suitable for your unique financial situation. Always seek help and assistance before making financial decisions this important.