Productive lending: Making personal loans work for you

Personal loans can be a powerful tool for covering significant expenses, consolidating debt or making investments that generate long-term income, such as investing in livestock or purchasing a taxi to start a business. However, the key to maximising the benefit of personal loans lies in focusing on productive lending. Productive lending enables borrowers to cover important, value-adding expenses that improve their financial stability or well-being.



Examples of productive expenses include covering urgent medical bills, funding education or professional training, making essential home repairs or investing in small business ventures. These expenditures have long-term benefits: They can boost your earning potential, secure your home or maintain your health. Importantly, these expenses increase your ability to repay the loan without falling into a cycle of debt. By focusing on productive purposes, borrowers ensure that personal loans lead to sustainable financial improvement, not just temporary relief.



That said, if you’re not careful, personal loans can also cause financial stress and lead to more debt. Here are some tips to borrow wisely and ensure that your loan works for you rather than against you:



1. Borrow only what you need



Before applying for a loan, calculate how much money you truly need and ensure that the monthly payments fit comfortably within your current income. Borrowing more than necessary can lead to higher monthly payments, increasing financial pressure.



2. Compare loan options



Shop around and compare different loan options. Consider fees, interest rates and repayment terms from various financial institutions. Choosing a loan with favourable terms and a lower interest rate will make repayment easier and more manageable.



3. Understand loan terms fully



Before signing any agreement, make sure you understand the full terms of the loan. Be aware of the loan’s duration, interest rate and any fees or penalties for late payments. Create a repayment plan that fits your budget and explore the possibility of paying off the loan early to reduce overall interest costs.



4. Use loans for productive purposes only



Use personal loans to pay for essential expenses or consolidate debt. Avoid borrowing for non-essential items like vacations or luxury purchases, as these can create unnecessary financial strain in the future.



5. Monitor your debt levels



Keep an eye on your monthly payments, and if they start consuming a large portion of your income, it may indicate that you’re overextended. Adjust your budget accordingly, focus on paying down debt and seek advice from a financial adviser if necessary. If you're struggling, talk to your lender about adjusting your payment terms.



6. Have a solid financial plan



Create a budget that includes your loan payments, and make sure you’re covering essential living expenses. Build an emergency fund to avoid taking on additional loans during unexpected financial difficulties. Set clear financial goals, such as paying off debt or saving for a major purchase, to ensure your borrowing aligns with these objectives.



By borrowing wisely and keeping your debt under control, personal loans can be an effective tool to achieve your financial goals without adding unnecessary stress. Stick to a sound financial plan, and you’ll be able to harness the power of personal loans for productive, long-term benefits.



**Natasha Winkler is Old Mutual Finance's managing director.