How to identify good vs bad loans

MANILA, Philippines — Loans: sums of money borrowed and expected to be paid back with interest after a certain period or time.

What you do with loans, once you take them, depends on you, but when you use them properly, they can be a powerful financial tool that can help you build a fortune or fund your life goals, so when it is time to pay, you would have already earned the amount back—and more. Loans can be bad when you do not have the capacity to pay for them yet still take them and use them for creature comfort.

In a country like the Philippines, loans can be availed of from many sources, from both legitimate and not-so-legitimate ones. Loans may be bad if you not only take them from “suspicious” sources but also in amounts and in terms that you are not capable of paying back.

Approach 'bad' loans with caution

According to the Bangko Sentral ng Pilipinas (BSP), over 34 million Filipinos still remain unbanked in 2022. This is why many turn to informal loans that come with more flexible terms and practically no paperwork. Borrowing from loan sharks is common; however, these usually come with exorbitant interest rates, as high as 20%. The source of funds is another big question altogether, as there is no way to check its legality.

Borrowing from friends and relatives is also a common practice, which requires a lot of trust between the two parties. These are often favored, as repayment schedules tend to be more lenient, but non-compliance with the terms could strain relationships, especially if not managed responsibly.

Other than the ones with not-so-ideal sources of funds, another bad type of loan is the one that you take out just to pay off another loan. This creates a cycle of debts that costs you even more money in the long run due to ballooning interest payments on top of the fact that this type of loan can be difficult to escape from.

Always be careful when deciding to go for these types of loans, as these might end up making you worse off afterwards.

Go for the 'good' kind of loan

When given the option, borrowing money from financial institutions has plenty of benefits that you may use to your advantage. You can apply to borrow larger amounts with longer repayment periods, which is helpful for bigger purchases. This also opens the door for more good types of debts, which are loans that can help you make more money or tick off certain items on your bucket list. A good example is a business loan, which you can use as capital to start your own venture or further invest in your current one.

Another bucket list item that can be easier to achieve through formal avenues is a home loan, as it gives you long-term payment schedules that can fit your family’s budget.

Aside from helping you reach your goals, these loans can also help build your credit score when you pay them off properly, which can be useful for loans you plan to apply for later in life to achieve even more goals.

More accessible loans

When you finally decide that you’re ready for your first formal loan, the next step is to apply for one. Many find this step daunting and get discouraged with the number of requirements, but banks like CIMB Bank PH have loan products that are accessible and easy to apply for.

With only one valid ID and one pay slip, you can easily apply for a Personal Loan of up to P1 million in just 10 minutes through the CIMB Bank PH app. The digital-only commercial bank also offers REVI Credit, a first-of-its-kind, all-in-one revolving credit line that provides easy access to a credit line of up to P250,000. CIMB has also partnered with GCash for GCredit, which provides access to a credit line of up to P50,000 with competitive monthly interest rates for as low as 1%.