Should You Really Go For A Personal Loan?

There are times in life when you need that extra cash to meet an immediate goal. If you have considered all other options like taking some help from friends or relatives and have not found a way out, dipping into your savings pool may not be a good idea. Instead, you can consider opting for a personal loan. However, there is no reason to assume that getting a personal loan is child’s play, in spite of the fact that you have had telemarketers chasing you almost daily. As with any other loan product, your CIBIL score will determine your loan eligibility here as well.

As the name suggests, a personal loan can be taken to meet a number of personal financial goals. You may need to pay for a medical procedure, make home improvements, pay for your own wedding or that of a sibling or you could be a small business owner who needs to make an urgent purchase for business expansion. At times, people also opt for personal loans to refinance or consolidate debt that is demanding a high rate of interest. But have you really considered which situations are best to take a personal loan? Let us consider a few instances and analyse whether you are better off with or without a personal loan.

1. Refinancing or consolidating debt
In theory, it may seem easier to pay off your credit card bills with a personal loan, but do remember that by doing so, you are only moving your debt pile from one place to another? You should, therefore, consider taking a personal loan only if you are lowering the annual rate of interest on your loan. For instance, the rate of interest on a personal loan can vary from 13.99-23%, depending on the lender you choose and your CIBIL score. This is considerably lower than an annualised rate of interest of 35% if you have managed to get yourself in the minimum amount payment cycle and are not making repayments towards your principal amount. You may also consider taking a personal loan if you have an outstanding amount on more than one credit card and wish to consolidate all payments. After all, it is obviously much easier to concentrate on paying off one loan rather than going through several repayments that are giving you sleepless nights.

2. Home improvement
You may think of taking a personal loan to make substantial changes to your home. But instead of taking a personal loan for the same, you may consider taking a bank loan for that specific purpose. Most lenders have home improvement loan products or offer renovation loans under which they finance 80-85% of the total cost of renovation you are undertaking. The lending amount for such loans can be up to Rs 30 lakh and interest rates may vary between 10.5% and 11%. Loans above Rs 30 lakh are available at 10.75-11.5% interest rates.

3. Medical expense and business purchase
If you need the money urgently for a medical procedure for yourself or someone in the family, you will be better off leveraging your medical insurance. Nowadays, most hospitals have a cashless facility – so you need not pay a lot of money immediately. However, you should not neglect this aspect and take adequate medical insurance cover well in advance. As for a business purchase, it is a judgement call that you need to make. But do consider taking a business loan from a bank prior to opting for a personal loan. There are several loans available for SMEs today that may offer better financing and repayment options.

4. Wedding and vacation
Undoubtedly, a wedding or a vacation can be a huge financial burden, but you cannot really call them unplanned or sudden. Taking a personal loan for the same means you will pay lower interest, compared to a credit card. But it is better to save up for such expenses well in advance rather than pay for them with a personal loan, which is an unsecured debt at the end of the day.

Personal loans are definitely a lucrative option and relatively easy to procure these days, but it only makes sense to take one if there is an unavoidable and immediate need for money. Another reason for taking such a loan is when there is an opportunity to save money on interest rates. Otherwise, if it is that designer outfit, diamond ring for your wife or a fancy trip with your family that you badly want, it is best to save money for it rather than pay interest on the purchase.

About the author: Rajiv Raj is the Director and Co-founder of www.creditvidya.com.
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