These days it is common for most of us to receive offers for personal loans from financial institutions. With rising costs of living, it can often be tempting to get one. But should you?
The good thing about a personal loan from a bank or financial institution is that you do not have to provide the bank with any form of collateral, and the loan money can be used any way you desire.
However, as attractive as the idea of having extra money may seem, personal loans do have their pitfalls. Although they are a useful means of getting some money upfront, personal loans are actually the NUMBER ONE cause of bankruptcy in Malaysia. Many people fall into the trap of instant gratification from a big pile of cash without considering if they can actually afford to pay off the debt.
Let’s look at some examples of situations where one typically may consider taking a personal loan:
Buying something special
Like any other form of debt, it is not advisable to take on a personal loan unless it is really necessary, say for a medical emergency. If you are thinking of taking a loan to pay for a trip to Bali with your friends or to get those pretty earrings you saw in the window at Habib Jewels, it is wise to avoid it completely. Instead, work towards saving what you need to buy the item you want, and only make the purchase when you have saved up enough.
Making an investment
Some people take personal loans and use the money to invest in things like shares and cryptocurrency. But please remember that investments carry high risks. Often, those selling investment products will promote very attractive returns – none of which are guaranteed. Imagine that you have taken a loan and used the money to buy some shares. If the price of the shares you have purchased drop, then you will not only have lost money on your investment, but also be stuck with the repayments of your personal loan!
Paying off multiple credit cards/other debts
Those with multiple credit cards sometimes think taking a personal loan may be a better way to settle their outstanding credit card debts. It can be, but only if the personal loan interest rate is lower than that of your credit cards. Be very careful and read the fine print when considering a personal loan, as some may have interest rates that are just as high as major credit cards!
If you’re getting a personal loan to help pay your other debts, go to Agensi Kaunseling & Pengurusan Kredit (AKPK) first and get some financial counselling. This is so you don’t make yourself worse off than before!
Above all, if you do finally decide to take a personal loan, please make sure it is from a bank or licensed money lender. Never, ever go to an Ah Long! Ah Longs or loan sharks are illegal and often use shady (sometimes even violent) ways to make people pay their debts. Furthermore, the interest rates they charge can be up to 20 times more than licenced money lenders/banks. Avoid them at ALL costs!
So, be careful and always live only within your means. Don’t take on any debt that you can avoid.