How helpful are personal loans & cash advance options?

By May 9, 2018Life Bits

It feels like a cold drink after a day in scorching hot sun, promising immediate relief and resolution of the situation that had you confounded. You have an emergency that requires finances. And just when you were about to go insane with worry, you discover the amazing option- personal loans & cash advance. Wow, the world is not a terrible place after all. In a matter of minutes, the paper work is done, your phone is beeping with the alert and you can finally smile at your mechanic, landlord, child’s school principal, doctor or whoever it is you need to pay to settle the emergency. Looks like a great story with a happy ending, right? Let’s find out.

How do personal loans & cash advance work?
It depends largely on the organization issuing the loan. If it is a bank, it will be required that you have an active account with them. Preferably, your salary account. That way they can ascertain your credit worthiness and process payment from source. If it is a microfinance bank, credit house or other such financial institutions, you will need to supply proof of employment and a few other documents. Although the loans often do not require collateral, interest rates will apply.

Pros of personal loans & cash advance
Speed & ease of access– these loan options are everywhere, and they are easy to access. Barring any complications with your documents, they can be processed within a few hours.

No collateral– you would most likely not be required to sign off your car, house or any assets as collateral. The loans are awarded based on employment status and ability to pay back.

Easy payment plan – the loan is often spread over a period, could be as long as 12 months, reducing the effect on your wallet.

Cons of personal loans & cash advance
Exorbitant Interest rate– The interest is often extremely high, sometimes well over 40%. This means you pay much more than you borrowed and would be tied down for a longer time. This interest sometimes accrues, meaning the longer you take to pay, the more you have to pay.

Incapacitated finances: Since you would be paying the loan over time, it means your purchasing power will reduce during that period as you would have to do without a substantial chunk of your income. Unfortunately, your needs will not understand that you are repaying a loan. The bills will come in as usual. This would imply that you might end up needing cash advance/payday loan every other month.

Limits your planning abilities; since your income is losing a substantial chunk, you would have no choice but to settle immediate needs with whatever is left. Consequently, you will be unable to save for major projects or invest for the rainy day. This could easily lead to financial stagnancy.

Puts you at greater risk – Things sometimes take turns we do not expect, having a loan around your neck could make such unexpected occurrences even more complex. God forbid a downsizing at the office affects you or your spouse falls ill and is unable to work for a while. Apart from the worry of managing slim resources to get by, you would also have to worry about the loan you are servicing. Health emergencies or accidents could also occur which could lead to more loans, bad financial decisions, and a vicious cycle of financial woes.

What’s the best option?
Loans are beneficial when the capital raised is invested for greater returns than the interest on the loan. If you truly desire financial freedom, your answer lies in proper financial planning and budgeting. These will ensure that you are not only able to live comfortably through the month but also have something stored for emergencies and other projects.

Four Quick steps to financial freedom
1. Have a budget- a budget is not negotiable, it helps you balance your needs vis a vis your income and plan your spending accordingly. We discussed budgeting in greater details here.
2. Live below your means- Don’t spend as much as you can afford or more than you can afford. As much as you can, spend a little less than you can afford to. That way, you can live comfortably without running into financial trouble.
3. Get a financial plan- What stage are you in the financial lifecycle? Do you have dependents? What is your financial growth plan. What financial choices suit your current stage? What investment opportunities should you be interested in? A sound financial plan will put all these in perspective. Talk to an advisor here.
4. Save/Invest consistently; saving is good as it ensures you have a nest you can fall back on during emergencies. Investing is however the real deal as the money doesn’t just sit cozy in an account, it gets to work and brings you more money. That way you get more in your reserve. Explore investment opportunities that require as little as 5,000 Naira here.