Your loan has passed approval; you have completed the documentation and the funds are in your checking account. What will you spend your loan money on?
In most situations, there is a specific reason for you to take out loans in the Philippines. Whether you needed a business bridging loan, home loan, car loan or personal loan, you needed the additional financial freedom to achieve something specific. Therefore, you know how to spend your loan and in case of secured loans, the bank or other secured loan providers know too.
In some cases though, you may have taken a personal loan or a home equity loan for a specific purpose, but eventually you find that you no longer needed the extra money. For instance, you may have intended to install a new bathroom, but the shop had reduced the fixtures to half the original price when the bank granted your loan. Such good fortunes (and cash windfalls) do occur occasionally . So, how will you spend the available money?
How you should spend your loan:
1. Use it for the item or project, which you originally intended
It may not be possible; the business opportunity may have passed or the item you wish to buy may have gone to someone else. It may be that you have had a miraculous recovery from a medical ailment, which no longer requires a lengthy hospital stay. However, if you have taken out a specific type of loan, ensure you stick to spending your loan as intended. Even if the business opportunity passed, keep the money safe so that it is available the next time the opportunity comes up.
2. Take up another project that will generate returns
With some specific secured loans in the Philippines, there should be a clause to allow you to return the whole amount within thirty days of drawing out the loan. However, if you have passed this point of being able to return the loan amount, without incurring an interest charge, you may want to find another use for the money you borrowed.
3. Use it to replenish savings fund
If you have taken out a home or car loan, the chances are that the down payment has wiped out your savings. Using any of the funds left over from your loan to replenish your savings fund is a good way to leave yourself a buffer for future financial constraints. It is always better to have savings, small or large, as a failsafe in times of financial uncertainty. The recent global economic crisis has made us all aware of this.
4. Make improvements to your home or business
If you have bought a new house or have taken out a home equity loan, you should best use any additional funds to improve your home. Homes depreciate if not well maintained, but will appreciate if you make improvements. Make that spare money work in your favor. Likewise, if you have taken out a business loan, you should invest the money into your business by improving some processes or mounting an ad campaign.
5. Pay of a smaller debt or a higher interest source
If you have enough to completely clear one or smaller debts with higher interest rates, do it. With most personal and home equity loans, the interest rates are far lower than those of credit and store loans. Therefore, you will save a significant amount on the interest payments if you can clear out these smaller debts.
How you should NOT spend your loan:
1. On a frivolous spending spree
It can be very tempting to have a spending spree when you have available money. It may seem a nice idea when you have some spare cash you were not expecting to have, but being frivolous with your money is never a good idea. Taking out loans in the Philippines is not an excuse to indulge a shopping habit.
2. On nothing
This is not the same as not spending the money you have available. This means that if you are going to spend the loan money you have available, do not spend it on intangible things. Spending unexpected money on things such as cable television installation or cosmetic treatments and procedures that have no intrinsic value other than making you feel better or happier is not a good idea.
3. On trading stock or currency options
You should not use a loan from a bank or lender to speculate on stocks and bonds or currency markets. These markets can be erratic and unless you are already an experienced trader or broker, you are unlikely to make a profit and you are more likely to lose the money with no significant chance of return.
Remember that if you are going to borrow money from the bank and pay interest, you need to be sure that you are spending the money wisely in a way that will bring a greater return than the interest you will pay. Most loans in the Philippines have safeguards in place to allow for total repayment in the situations where the loan is no longer required or for partial repayment if the required amount is significantly higher than the loan approved and granted.
Poor spending choices can turn a loan investment into bad debt. Carefully consider the types of loans in the Philippines that you choose. Conditions and repayment terms may also be useful to note if you wish to make a lump-sum partial repayment.
Photos: From Contributor