Increasingly, the editorial team at DollarsAndSense is seeing more articles and advertisements for personal loans. On the surface of it, we should not be too surprised – current market conditions are ripe for more people to take up a personal loan.
Persistently high inflation has raised the prices of our groceries, utilities, and healthcare. Rising interest rates – hiked in an attempt to fight inflation – have increased our monthly mortgage and car loans. As a result, the global economy is also on the cusp of a recession, adding further financial uncertainties and pressure. Already we’ve begun seeing layoffs from many companies in the name of cost-cutting.
With the cost of living going up, and heightened uncertainties in the economy, some people may find themselves short of cash – and potentially need to turn to personal loans.
Should Personal Loans Be Marketed So Aggressively?
The point of marketing a product and/or service is to amplify awareness, and ensure consumers understand and eventually buy it. In this regard, all businesses – including those disbursing personal loans – ought to be able to market their products and/or services.
This is reinforced by the fact that there is no legislation in Singapore that explicitly regulates the advertising industry. However, just like we do not see cigarettes advertised today, a framework already exists to restrict or limit certain types of products and services from being advertised.
Specifically, cigarettes and other types of tobacco products are controlled under the Tobacco (Control of Advertisement and Sales) Act. Among other limitations, this act also confines tobacco product packaging and requires a warning notice, bans on-site product displays, and disallows other products to be given as free gifts during sales.
Tobacco products are not the only type of products that have limitations placed on them. A simple Google search will reveal a wide variety of different restrictions placed on many types of products in Singapore, including alcohol, betting, casino and gaming houses, medicinal products, sugary drinks, and even politics, fortune-telling, and geomancy, and others.
Reading this list, it’s easy to see why advertising restrictions are imposed on certain categories of products and services. In the same vein, it can be clear why we cannot look at a product like personal loans in the same way we look at a pair of shoes, a food delivery service, a handphone or even credit cards.
Difference Between Incentivising People To Apply For Credit Cards VS Personal Loans
Most of us can appreciate the idea that providing incentives to a person person to buy a pair of jeans or even a car is vastly different from doing so for taking up a personal loan. For a start, buying a pair of jeans will not lead to financial ruin. At most, we may regret buying a piece of clothing. For those buying a car, we will likely have the financial means to pay a down payment for such a luxury purchase in the first place.
Taking up a personal loan can lead to much bigger financial implications. If we are unable to repay the personal loan, our finances can be impacted in the long term. For instance, any amounts that we are unable to repay will continue to compound, possibly at much higher interest rates and with additional fees. We may be left with a debt much larger than our original personal loan and unable to service the loan.
A person who is already desperate enough to be potentially lured to take a personal loan is not someone we should be giving even more incentives to. Simply put, unchecked marketing of personal loans may lead to significantly poorer financial outcomes for individuals.
The concept of providing upfront cash incentives for taking up a financial product is quite prevalent for credit cards as well. However, getting a credit card is not the same as taking a personal loan. Credit cards are a common payment method that many of us already use, whether for online and in-store purchases or even just to pay for public transport usage.
Personal loans are not something many of us will use or think about on a daily basis. When given upfront cash to apply for a credit card, many of us will think about optimising our credit card usage. However, the same upfront cash for a personal loan will not get anyone except the most vulnerable individuals to consider the product. The cash incentive will play on their minds as they are short on cash, and potentially drive them into a poorer financial situation.
Nevertheless, personal loans is a product that can be useful, if used appropriately. When an individual requires a personal loan, they should seek the solution or get advice to consider the solution, rather than be fed it on a daily basis.
Practical Reasons To Take A Personal Loan (And Why You Should Not Think Of It Otherwise)
We can think of a couple of reasons why a personal loan can come in handy for consumers.
If we have existing debt, such as credit card balances, that charge an exorbitant interest rate. Currently, interest rates on our outstanding amounts can be above the 25% p.a. mark. Promotional rates on personal loans – from what we have researched online – can still be significantly lower.
Even then, we do not need to resort to personal loans as a default option. Often, we can seek a Debt Consolidation Plan that will typically consolidate all the debt we have trouble paying down with 1 financial institution, and offer an interest rate similar to that of a personal loan. Taking a personal loan will just add another unsecured loan that we have to shoulder – and likely with yet another financial institution that we have to deal with now.
A personal loan can come in handy if we have lucrative business opportunities that we can tap in the short term. Since personal loans can be shorter-termed and disbursed quickly, business owners may be able to benefit from such loans.
For a start, business owners using personal loans should be savvier than consumers to understand the implications of such loans. Even if we are, we may be better off using business-related loans, including working capital loan, trade financing or even P2P business loans. We can speak to representatives from our business bank account for advice on how we can proceed with a long-term solution too.
Finally, despite what we may read online or be sold, personal loans should not be used for the following reasons:
– Home renovations or wedding expenses (because they are known expenses, and we should save for them and/or reduce the extent of our renovation works/travel plans to fit our budget)
– Emergency expenses (because we should build an emergency savings fund of 3 to 12 months’ worth of expenses)
– Pay for a vacation or buy a car (because we should live a lifestyle we can afford, rather than take up unnecessary loans to live more luxuriously, and stressfully!)
– Invest (because we can easily lose the money…we should not need to say more)
As we can see, there are some practical reasons to use a personal loan. In almost any other scenario, we should not be considering a personal loan.
Even in the scenarios where a personal loan makes sense, it may not necessarily need to be the default option or best option either. We should shop around to ensure we are getting the best deal. Most of the time, the best deal is the lowest interest rate.
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