The common point of view on debt is to avoid credit cards and loans at all costs – exhaust all other options before even considering them. In an ideal world, you can afford to pay for everything with cash, but in reality, even financially responsible people may find that they need a loan. In some instances, taking a personal loan may be necessary or the smart thing to do. Whether it is for an emergency or a purchase you absolutely have to make, borrowing is a legitimate option in some cases.
When You Have to Make a Purchase
Let us be clear, if you are borrowing to pay for your lifestyle, then the last thing you should do is take out a personal loan. Rather, you should focus on trying to live within your means. That means a vacation, new car or new furniture are all items you should only purchase if you can afford to pay for them from your own income or savings.
On the other hand, if you need a vehicle to get to and from work, then you have a legitimate reason to take a car loan. If you can not afford your children’s school tuition, then borrowing from the bank is necessary.
When You Can Make the Monthly Payments
You might be telling yourself this one is common sense. Unfortunately, there are people in the UAE who default on their loans. Do some simple math, and figure out how much of your income would be left over after paying off your recurring expenses. This should give you an idea of the maximum monthly payment you can make towards a loan. Do not fall into the trap of taking a large personal loan and hoping for the best to meet the equal monthly installments.
Keep in mind that most banks in the UAE will ask you for a blank cheque when they lend to you. If you miss enough payments, they can then try to cash that cheque for the loan amount. This means that in addition to a civil court case for defaulting on your payments, they can also open a criminal case against you for the bounced cheque.
When It Is a Medical Emergency
There is probably no situation that justifies taking out a personal loan more than having to pay for a medical treatment for yourself or a family member. If you do not have health insurance, or the insurance company is not covering a certain condition, then the medical costs can quickly add up here in the UAE. In such cases, you may not be able to pay for the cost of an operation or expensive medicines. Your physical health is more important than your financial health, so taking out a personal loan may be the safest choice.
When the Return on Your Savings or Investments are High
If you are ever thinking of selling an investment to make a purchase, you should analyze the rate of return first. For example, if you are making an 11% return on investment each year, then if you can borrow at an interest rate that is lower than that, you should consider it. Say you can apply for a personal loan with a 5% interest rate but you decide to sell your investment to pay for the purchase instead, then you are essentially giving up 6% of profit on your money.
If you can afford to make the personal loan payments, then keep your investment intact and borrow from the bank at a lower rate. This way, you will also maintain your emergency funds in case you need them in the future. However, if interest rates are very high (in our example, 11% or more), then liquidating your investment portfolio make sense.
If You Can Pay It Off Earlier
If you know you have a large amount of money coming in the near future, but you have a major expense you need to take care of before then, taking a loan and repaying it early is not such a bad idea. Most banks in the UAE charge you a prepayment fee of 1% of the loan amount, so it will not cost you much to pay off your debt early. Of course, this strategy only works if you pay off the loan as soon as your money arrives. For example, if your company does not transfer your year-end bonus until after a few months, then this option may be relevant for you.
Sometimes, borrowing can be done responsibly. In other cases, you really have no choice and are forced to take a loan; even then, you can make the smart decision by comparing credit card and loan options in the UAE on bayzat.com.