We all work hard to sustain ourselves and to save for our future. But every now and then, this is not enough. We fall short of money and may need a hand to push us through life’s tricky situations. So we borrow money.
What are our options? We can borrow from relatives or friends. But this puts us in the unsavoury situation of disclosing the extent of our financial problems. We can approach private lenders, but they will charge us a massive interest rate, sending us spiralling into a debt trap. We can borrow from our employers, but such sums tend to be less than our needs. What option do we have left then? We go to banks or financial institutions which offer us loans.
How do banks help?
Banks allow several loan options to meet your short-term fund requirement. You can take a loan against gold or jewellery, a loan against your LIC policy, overdraft against fixed deposit, loan against property, and personal loan. If you don’t have any security to keep with the bank and raise a loan against, then you are left with only option: go for a personal loan.
Mind the charges
You incur interest on a loan, whether it’s a home loan, car loan, or a personal loan. But there is a sizeable difference in the interest rates of personal loans and other loan products. For example, you can get a home loan with an interest rate in the range of 9.4-11%, car loan at 10-12%, and loan against gold at 11-13%. But personal loan can cost you between 13-24%. The processing charges, penalties, and payment terms can also be fairly strict in a personal loan.
Understanding personal loans
A personal loan fulfils your short to medium term financial requirements without having to pledge an asset as security. You don’t need to disclose the reasons for taking the loan, or have to submit a project report. The major difference between any other loan and personal loan is associated with the security and therefore to its interest rates. For example, for home loans, banks hold the ownership of your home till the repayment of the full loan amount. However, for personal loans, there is no collateral, which forces banks to charge a higher interest rate to cover their risks.
|When You Should Say Yes to Personal Loan|
Eligibility for a personal loan
One can apply for a personal loan with a bank where he or she holds the account with a regular flow of income. The bank will offer the loan with their terms and conditions.
The banks will scrutinize your source of income, income stability, and assess your other ongoing loans. Net monthly income in hand plays an important role in getting the loan.
If you don’t have any other loan at the time of application and have a good CIBIL score and clear credit history, then your chance of getting a personal loan is high.
Saying ‘no’ to a personal loan
In the modern world, wants are unlimited. We look to upgrade our gadgets, our lifestyle, and our spending habits every few month to keep up with our friends and colleagues. Therefore it is absolutely important that these wants are fulfilled through the income we ordinarily generate. Having to indebt ourselves to support our lifestyle would imply spending way beyond our means. This is not a sustainable habit and can lead to financial ruin.
If your fund requirement is not urgent, avoidable, or can be sourced from other options, then it is better to not take a personal loan.
You may have a healthy income but servicing more than two active loans will damage your credit score with CIBIL. Every bank checks your credit history with CIBIL and you should carefully weigh our decision to take any loan. Too many loans would not only harm your credit score but also impede your ability to repay them, thus sending you into a credit debt.
Life is full with uncertainty. Let’s say you are in a situation where you absolutely must take a personal loan. It could be for an emergency like settling a hospital bill, a life event like marriage, or funding your child’s tuition fee, or an urgent business payment. And let’s say that all your other avenues—including your savings—are exhausted. This expenditure is not frivolous or avoidable, and a loan must be absolutely taken.
This is where you say yes to a personal loan—but only within your repaying capacity, and no more.
Select your lending bank after properly analysing the interest rate, processing charges, and penalty rates. Make sure you’re comfortable with the loan tenure and would be able to settle the debt in a timely manner.
Personal loans should be used as a last resort to meet an unavoidable expense. It should ideally be avoided for financing lifestyle choices where you spend beyond your means. Regular savings and financial discipline will give you the financial freedom you need, allowing you to spend on your heart’s desires without indebting yourself.