Why take out a personal loan?

With the cost of living constantly increasing, and an emergency perhaps catching you - and your wallet - unprepared, it’s easy to find yourself in a financial pickle. In situations like this, a personal loan, if correctly used, can come in handy.

We consider three ways in which personal loans can be used to your benefit, and whether this form of credit is something you should pursue.

Tip: Are you facing unexpected expenses? You can apply for a personal loan here.

Beneficial uses for a personal loan

Ayanda Ndimande, head of Sanlam Business Development for Retail Credit, notes that the reasons for taking out a personal loan are many and varied. 

Three of the more beneficial uses of this form of credit are as follows.

1.Debt Consolidation

The DebtBusters Debt Index for Q1 2022 found that consumers who applied for debt counselling were spending an average of 62% of their income on debt repayments.

If your debt-to-income ratio is similarly high, a personal loan can enable you to combine your repayments into a single instalment, and reduce the amount of interest paid.

Ndimande notes that using a personal loan in this manner will benefit your cash flow.

2. Emergency fund

The main allure of a personal loan is flexibility. The loan amount, once approved, is yours to use as you wish. In addition, once an application has been lodged, checked, and approved, payment is relatively quick.

This can help enormously with emergency situations, such as a medical need, an urgent home repair or renovation, unanticipated school-related expenses, or fixing or replacing broken appliances.

3. Building a credit history

Provided you meet your repayments on time and in full, a personal loan can assist you to establish a good credit history, and improve your credit score.

Ndimande explains, “Your credit score is the information a credit provider considers in deciding whether or not to grant you credit. The higher your credit score, the less risky you are for them.”

A higher credit score means your chances of obtaining a loan are improved, and you may well be offered a better interest rate.

Is a personal loan a good idea for you? 

Ndimande recommends personal loans if used for a purpose that adds value to you.

Jan Moganwa, CEO of Old Mutual Finance, offers a simple rule of thumb – that personal loans should be used for needs, and not for wants.

“A simple example would be borrowing money for a luxurious holiday, only to find that the holiday’s memories have faded long before the payments are done,” he says. “When you take out a personal loan it’s important to remember that you are taking on debt. You should only do so if there is a good reason for it.”

A good credit score could result in a lower interest rate on your loans. Click here to view yours.