Ideally, you'd never need a loan. But life happens and sometimes you need extra cash to cover an unforeseen expense. Cars break down, and appliances sometimes need to be replaced. But this is where we have to be careful. It's all too easy to convince yourself that you need a personal loan for a certain purchase, when it would be wiser to put off borrowing money until you really need to. That begs the question, when is a loan justified?

There are six points that should be checked off before you apply for a personal loan.

YOUR PURCHASE IS ESSENTIAL

Essential expenses are those that need to be met for you to carry on living your normal day-to-day life. It's possible that you might need a loan to cover vehicle repairs or dental treatment not covered by your medical aid. But a new TV isn't essential, and when you take on loans for such expenses, you reduce your chances of qualifying for a personal loan when you really need it.

You're able to borrow only so much at any one time, and every loan reduces the likelihood that you will qualify for another. Before taking a loan, always ask yourself, is this necessary? There is a difference between buying furniture for an empty house and buying furniture to replace a lounge suite that has only just started to fade.

YOU INTEND TO USE THE MONEY TO ADVANCE YOURSELF

The greatest investment you can make is in yourself, and any money spent on training and upskilling is money well spent. When you know that a certain qualification or skill set will make you more employable, it can make sense to further yourself with a personal loan. But education and training aren't the only tools that you might use to progress yourself. If you’re a small business owner you may require an SME loan for equipment that helps you get a job done faster and more efficiently,

YOU ARE ABLE TO BORROW FROM A RESPONSIBLE LENDER

There's a reason that some lenders will offer you a loan while others won't. Irresponsible lenders have no qualms about saddling you with crippling debt that they know you might not even be able to pay off. Their interest rates are high enough to ensure that if the odd customer defaults, they're still able to cover the cost.

When considering applying for a personal loan, just remember that bad debt lenders will take their pound of flesh one way or another. If you can't get a loan from a reputable lender, reconsider how badly you need the extra money and make an informed and responsible decision thereafter.

YOU CAN EASILY AFFORD THE PAYMENTS

This should go without saying but in times of trouble, people can become desperate enough to take out a loan that they are unable to pay back. By only taking a loan from a responsible lender, you avoid taking on unmanageable debt, but you still need to adjust your budget so that you can see how much you'll be left with after your monthly payments.

Of all the boxes you check before applying for a personal loan, these are the most important: borrow only as much as you can pay back, and only borrow from a responsible lending institution. Institutions that offer quick loans and charge excessively high interest rates are not responsible.

YOUR INTEREST PAYMENTS ARE LESS THAN INVESTMENT RETURNS

Many investors choose to liquidate an investment before they consider applying for a loan. For example, some might sell their unit trusts to afford a certain expense. While this is an option, a personal loan might make more financial sense. If the interest rate on the loan is lower than your rate of return from your investment, it would be better to take the loan and leave your investment to carry on working for you.

Let's imagine that your unit trusts earn you a return of over 9% and that the interest on a loan was 7%. In this case, you'd lose more (2%) by selling your investment than you would if you took the loan. And, whatever you do, never touch your emergency fund unless it is for a real emergency. It's much faster to get money out of a savings account than it is to get a loan approved.

THE RISK IS ACCEPTABLE

Unlike credit cards, personal loans have to be paid off within a certain time period. If you fail to pay off a loan in this allocated time, a lender could take you to court and have you blacklisted. This would do serious damage to your credit score and make it difficult for you to apply for a home loan when you decide to do so. Read the fine print on the contract and be aware of the penalties for late payments.

Also, pay careful attention to the kind of interest rate offered. A promotional rate can start low (as low as 2 percent) but then jump to a higher rate after a certain time period. If you tick one of the first two boxes, and then check three, four, and five, a personal loan might be just the solution you are looking for. Just ensure that when you do apply for a loan, that it is with a responsible lender and that you've read the fine print.

For more information on our personal loan, SMS “LOAN” and your town to 66522 or call your Financial Consultant today or visit www.oldmutual.com.na