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With a personal loan, or more specifically, with a loan that is guaranteed by the borrower’s creditworthiness, you can get cash for relatively short-term needs to finance large expenses like tuition, weddings and home improvements, purchase long-term goods such as household appliances, or deal with unexpected emergencies, etc.

Before applying for a personal loan, we recommend you take the following steps:

1. Prepare a very detailed and realistic annual budget.
2. Analyze your debt carefully; consider the possibility of consolidating your debts, analyze terms, interest rates, monthly payments and the time pending cancellation of your debts.
3. Define your short, medium, and long-term financial goals.
4. Prepare a financial plan; namely, map out what actions you need to take to reach these goals.

If you have considered applying for a personal loan, we recommend that you choose a reasonable term; one that is not too long. Do not aim for an 8, 10, or 14-year loan. Strive for a loan no greater than 5 years, it is not only the most practical, but it will allow you to have more flexibility in the medium and long term.

It is understandable that some people want a longer repayment term on their personal loans because of the lower monthly payments. However, you will end up paying for a longer period of time. This may have its advantages, but also its disadvantages.

Perhaps one of most significant drawbacks is that, as we grow older, our needs change and shift from our children or other non-personal factors to more personal needs. If you apply for a loan today, let’s say for 10 years, and you are already 45 years old, you would end up paying off this loan at 55. It is during this stage of your life that, perhaps, your children need more financial support for college tuition, it is time to purchase a new family car, or one of you children is getting married. It could also happen that you wish to remodel your home, acquire a second home with a mortgage or invest in some new opportunity that has caught your eye, but now, you are tied down with a long-term commitment that restricts your dreams.

Another important disadvantage in applying for a long-term personal loan is its limitation on your retirement savings plan. Bear in mind, also, that the longer the repayment term of the loan, the greater the total interest, as well as the time it will take you to possibly refinance. To take care of a short term need at a medium or long-term financial cost is not good business.

Analyze the loan amount that you wish to apply for, while considering your future needs and plans. Only request what you really need; neither too much, nor too little, and aim for the shortest term possible that is in line with your possibilities and future plans.

Regarding the above, we believe the following chart can be a helpful tool in analyzing your current debts, taking into account interest rate, repayment term, loan balance, and monthly payments on obligations.

Analyze your current debts with the help of the following example:

Creditor	Purpose of loan	Repayment term (months)	Loan rate	Loan Balance	Monthly Payment
Bank A	Trip	24 months	13%	US$ 2000.00	US$ 125.00
Total:				US$ 2000.00	125.00

In order to take full advantage of the chart, you should take the following steps.

1. Review your gross monthly salary and divide your fixed monthly obligations by this amount. You will obtain your debt-to-income ratio.
   
   Example: If after income tax, social security and education tax deductions, etc, you have US$ 500.00 left per month and pay fixed monthly debts of US$ 125.00; your debt-to-income ratio is 25%. That is, for each net dollar earned, 0.25 cents are for paying debt. Twenty-percent is the maximum percentage of debt-to-income ratio that lenders consider sound, financially speaking. If you are a government employee in Panama, your debt capacity is 35%. For private business employees, the law establishes a maximum of 20%. Retirees and pensioners can have a debt ratio of up to 75% of their monthly income.
   
2. Decide on the amount of money you will need. A large loan entails higher monthly payments and additional costs, such as bank and insurance fees. Thus, the amount requested when applying for a loan must not be cut down to the exact amount needed, but it shouldn’t be that much higher than what you require.
   
3. As far as using personal loans to consolidate small amounts of debt or credit card debts, consider the loan amount to refinance, refinancing term, the cost of the same and your future plans. Remember that by consolidating your debt, you will owe money for a longer period of time, but with the advantage that you will have more liquidity. If you are close to paying off some of the debts that you wish to consolidate, you will be better off if you wait it out a bit. In case you want to consolidate your credit card obligations and you have more than one card, try to pay off the better part of it, and keep only the cards you need. Thus, you avoid using the cards again to finance unnecessary expenses. The latter may worsen your liquidity problems.
   
4. Choose a financial entity that offers you the most competitive interest rate, the best loan conditions and the most flexible terms, keeping in mind the recommendations we have outlined above.
   
5. If you have been paying your debts and, at some point, you cancel a number of them, plan for the entire sum, or part of it, to be put aside as savings.
   
6. When you have chosen a financial entity, visit a branch and request a loan. Remember that you must provide the necessary identification and economic solvency documents. You must also prove your ability to pay and debt capacity.
   

Your capacity to repay the loan is key to being approved. A serious bank will always advise you on how to avoid incurring in too much debt. Listen and ask questions if you have any doubts.

A personal loan is an excellent choice to confront short-term needs. It will be your best overall financial solution, providing you clearly establish specific needs and maintain strict financial discipline.