When To Say “Yes” To Personal Loans

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 unsavory 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 spiraling 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 fulfills 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.

Saying ‘no’ or ‘yes’ to a personal loan

We have unlimited wants. We look to upgrade our gadgets, our lifestyle, and our spending habits every few months. It is absolutely important that these wants are fulfilled through the income we ordinarily generate. To in-debt ourselves to support a lifestyle would imply spending beyond our means. This isn’t a sustainable habit and can lead to financial problems. Also, if you’re servicing one loan already, taking on a personal loan would stretch your finances and make it difficult to pay two EMIs. If your fund requirement is not urgent, avoidable, or can be sourced from other options, then perhaps you don’t need a personal loan.

But let’s say you are in a situation—like an emergency such as hospitalization, 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 analyzing 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.

Paying off the loan

Once you have a loan, you require financial discipline in order to pay it off. Make sure you set aside enough funds for your EMIs. If possible, also make pre-payments on the loan to reduce your interest outgo. Finally, paying off a loan is your legal and moral obligation, therefore always pay off your loans fully. This would reflect well in your credit history, boost your CIBIL score, and allow you to access to future loans at cheaper rates.