Is a personal loan good or bad?

“Utang” has a bad reputation among Filipinos. We often associate them with “5-6” lending and loan sharks – in other words, higher interest and unmanageable repayments. But are all types of “utang” that bad? Is it bad to take out a personal loan? In this article, we’ll talk about whether loans are bad, things you shouldn’t use personal loans for, and how to use them effectively.

Are personal loans bad?

It’s common to hear cautionary tales about taking on debt--you’ll pay exorbitant interest rates that make it very difficult to pay off your original balance, essentially burying you in debt.

While such scenarios can happen, loans don’t always have bad endings. Personal loans are quite different from other types of loans. When you take out a personal loan, you receive a specific amount in a lump sum, which you need to pay with a fixed interest rate for a specific period.

This means that if you consistently pay monthly, you’re guaranteed to pay off your loan. The same goes for other types of debt, but it tends to be easier to pay off something when there is a fixed repayment term.

An arguably more important consideration is what you are using the loan for. Personal loans are not a bad thing if they’re used correctly. It’s important to consider how to use personal loans effectively so that you come out better off in the end.

What can’t you use personal loans for?

One of the best things about personal loans is you can use them for a lot of expenses. However, besides illegal activities, there are certain things we discourage using your personal loan for because they can end up hurting your finances. Check out what these things are:

Risky investments

Investing in your education, career, or a business offers great pay-off for your financial health. Investing in stocks or equities can also be good ways to build wealth. However, using loaned money for this type of endeavor is risky. Why? Most personal loans have a higher interest rate than the returns most investment instruments offer. If you borrow money to invest, you may end up using all your investment income to pay for your personal loan. So, what should have been an income, will likely end up as a loss.

A smarter investment choice would be to raise funds and invest what you can in investment products within your price range.

Basic living expenses

If you’ve been struggling to cover your living expenses, it may be tempting to get a personal loan to help you until you get back on your feet. However, personal loans cannot solve cash flow problems.

What is cash flow? For individuals or households, this refers to the movement of money. Specifically, your income is the money that comes in while your expenses, such as bills, are transactions where money comes out of your pocket. So, if the cash coming into your household is not enough to cover your expenses, you have a cash flow problem.

A loan may temporarily relieve cash flow problems, but it would only become another burden if your income can’t cover the household expenses and debt. A credit card may help you better manage your cash flow. But remember that credit card debt can accumulate just as easily, it’s best to employ strategies for budgeting and saving money.

Gambling

It goes without saying that using personal loans for gambling is one of the worst things to do. Gambling alone is risky. But if you lose the loaned amount on gambling, you’ll not only lose money but have additional debt to pay after. Avoid getting into more financial trouble. If you can, avoid gambling completely.

Home downpayment

If you want to buy a house immediately, incurring another debt to cover the 20% downpayment is not the most effective way to use a personal loan. It may even cause more problems for you.

Adding a personal loan to your housing loan will further increase your debt-to-income ratio or how much of your monthly income goes into paying debt. Doing so can potentially leave you with insufficient cash flow to cover your basic living costs and other expenses.

A high debt-to-income ratio puts you at risk of defaulting on your loans and potentially losing your house. We suggest being more patient with saving up for your dream home’s downpayment and look for an affordable home loan.

Personal loan mistakes to avoid in the Philippines

Check out some of the most common mistakes Filipinos need to avoid when taking on a personal loan:

Not doing your research

Don’t accept loans from the first lender that promises fast approval. This practice can be disadvantageous because you may end up with an illegitimate lender or payday loans which are short-term but high-interest loans you pay on your next payday. Overall, you need to research your loan options so you don’t miss out on better terms from another credible institution. It’s better to spend some time looking for credible lenders and comparing their offers before deciding.

Missing payments

Make sure that you have enough balance to pay for your monthly amortization to avoid the late payment fee.

Since Metrobank requires auto-debit arrangements, you simply need to make sure that you have enough funds in your account. Double-check in your statement the total you need to pay every month so you can prepare the correct amount.

Overspending

Setting a budget can help make your finances more manageable. A personal loan can do the same for your wallet, but only if you avoid overspending. Having a budget makes sure that you always have enough cash to cover your basic living expenses, loan repayments, and still have enough to save up or cover emergencies.

Not using the loaned amount for its purpose

A common behavior is using a personal loan for impulsive purchases rather than its original purpose. Borrowers have a misconception that once they have been approved or disbursed with the funds, they can do whatever they want with it and their behavior may change. However, mismanagement of personal loans can lead to low credit scores which impacts future borrowing capabilities.

It’s important to remember the difference between a personal loan vs credit cards. While you can use credit cards for various expenses, it is always better to use personal loan for its original purpose, ideally one that helps you through a financial problem or allows you to grow your assets.

Are you ready for a personal loan?

Personal loans are designed to help Filipinos grow their finances, but to do that, you need to be disciplined enough to know what you can’t use it for and ensure that you are avoiding the personal loan mistakes listed above.

Think you’re ready for one? Apply for Metrobank’s online personal loan today