What Are the Pitfalls in Paying Personal Loans?

Personal loans are popular sources of extra cash for people from all walks of life. Loans today come with easier application which can be transacted personally with banks or through online sites. They can be addicting at some point.

Common purposes of personal loans are for basic necessities like home renovations, school tuitions and medical expenses. Others, however, choose to spend the borrowed amount for luxuries and body care services as shown by the growing trend (and lending problems) in most western countries (leading to economic meltdown). Having easy money in short time with usually no required collateral at all is indeed very convenient. It can make the borrower feel like heaven while spending but hell when paying. This is especially true if finances are not handled wisely.

Suffering in the payment of personal loans can be avoided if regular source of income is present. However, this alone does not suffice most of the time. An option taken by borrowers is to extend their amortization terms to lower the monthly due. Unfortunately, extension is very limited in unsecured loans. Extension may also mean higher interest rate.

Other borrowers try venturing into small-scale businesses with hopes of earning right away. Given that a feasibility study is furnished prior to actual investment, the mean rate of ROI (Return On Investment) and not the value per se should be the top deciding factor for a particular business as banks are time sensitive. The right amount paid at the wrong time is still a violation; thus, a corresponding fine is given. If revenue is expected to kick-off in roughly a year, then it is not a good idea for payment scheme back-up.

Relying on interests from time deposits or regular bank accounts is also not viable and lucrative enough as source of payment. Interest rates of bank accounts range from .5% to 5%, depending on the type of account opened. Compared to the 8%, to as high as 26% interest rates of personal loans, the amount you can earn may not even reach half of the needed bill. It’s better to use the money elsewhere than stash it in banks while praying that the monetary value fluctuates to your advantage.

If personal loans cannot be avoided, make sure that there is at least a stable and sufficient source of income every month. There are also a lot of investments to choose from to ensure that the borrowed money is moving and appreciating in the market.

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James Henry Abrina is an editor, writer, SEO specialist and currently a Corporate Communication Professional, Market Desk Strategist, Business Development Officer and Unit Head for Business Profiles Incorporated.

He currently specializes in security management and business intelligence. Together with the company, he advocates Business Continuity Planning to change how the Philippine business sector sees the definition of crisis response and management.

For more useful information, read his articles at Invisible Squares and Masscom Tutor. Or his EzineArticles page.