Before you commit to any debt, it pays to evaluate your spending and to fully understand what you’re signing up for Image Credit: Getty

Ask any reputable financial adviser and they’ll tell you that a long-term sensible savings plan is always preferable to short-term borrowing.

However, real life is rarely that straightforward and there are certain times when a personal loan might actually benefit your financial situation. For example, people take out a loan for their wedding or honeymoon expenses. 

As much as this is a once-in-a-lifetime experience, the implications of starting your married life with a loan to repay may not be appealing. 

Before you commit to any debt, it pays to evaluate your spending and to fully understand what you’re signing up for.

“You have a duty of care towards your own future to make sure you can afford the repayments,” says Stuart Porter, an independent financial adviser and author of Expatfinance.me. 

“Identify what you have spent for the past six months based on bank and credit-card statements so you know what your budget really is. The longer the time period you borrow over, the higher the risk that something may change in your circumstances, affecting your ability to repay, so always borrow for the shortest time possible within your means.”

 

Don’t dance with the debt

If you’re paying off debt on a number of high-interest loans or credit cards, consolidating payments with a single, lower-interest personal loan could save you money and streamline your monthly payments in the process.

“High-interest loans such as credit cards typically cost the borrower around 36 per cent per year,” says Dilip B. Manjunath, Senior Wealth Architect at Elixir Wealth Solutions. “If you fold all your high-interest debts into a lower-interest loan, this figure could be reduced to around 6-7 per cent.” 

You’ll need self-discipline, however, warns Tim Searle, Chairman at Globaleye Wealth Management. “Ensure you don’t rack up fresh debt on your now paid-off cards. Otherwise you’ll be stuck with paying off your new loans and your old debt too.”

 

Save together for the kids

In an ideal world, parents will set aside savings for their children’s school and college from their day of birth.
 
In reality, rising private school fees and recent years of economic instability have left many families unable to plan ahead. “School and university fees are expensive enough already, and adding bank interest into the cost does not seem like a good use of money to me,” says Porter. 

“However, some banks do offer interest-free loans via credit cards for school fees. There is a nominal arrangement fee, but can help with budgeting.”

Current loans on offer include ADCB’s Education Loan and the NBAD GEMS credit card, which offers a zero per cent payment plan for 12 months, plus a 7 per cent discount on advanced payment against any GEMS school.

 

Play the long game

Spending towards your own career and education can reap financial benefits in the long term, says Porter. That could mean buying a car on finance to get you to work, or investing in an MBA to increase your qualifications and remain relevant in the employment market.

But before you commit, evaluate the course length, its validity, its links to the business community and, most importantly, whether you’ll be able to keep up the repayments. 

“If taking out a personal loan can assist you with acquiring an MBA, which can later land you a higher paying job, then that may be worth considering,” explains Searle. “However, if you know you can get a better job with a good MBA, find out if the employer is willing to sponsor you in the first place.”

 

Home is where the money is

Purchasing a home is one of the largest investments the average person will make during their lifetime, and maintaining or upgrading that asset can offer financial returns. “The first thing you need to ask is whether an improvement is feasible,” says Manjunath. 

“Certain home improvements can increase your property value above the cost of the improvements themselves, such as remodelling a kitchen or upgrading landscaping. But it needs to be done well — a bad remodelling job will do little to boost your property value.” 

An unsecured loan isn’t always the best value option, says Searle.

“If you own a property, you may be able to borrow money while using your property as security against the loan, which should allow for a more favourable interest rate. Remember that property prices can go down, which would compound your debt and leave you with a depreciating asset.”