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Why is a personal loan good for you?

Personal loans come under the umbrella of retail loans and are one of the preferred means of tackling financial disarray.

Brand stories Updated: Feb 06, 2017 15:04 IST
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There is a growing realisation about the usefulness of loans in India. Borrowing a lump sum to meet financial needs and paying it off in instalments is seen as a great way to make life easier.

As we accept the idea of living with credit, the retail loans industry has seen strong growth. Banks and finance companies woo customers with attractive loan offers, easy payment terms and low interest rates.

Personal loans come under the umbrella of retail loans and are one of the preferred means of tackling financial disarray.

These loans differ from housing, automobile, and gold loans. That is because personal loans are largely unsecured loans. They do not require the backing of any asset. You can use a personal loan to meet any kind of personal need. You may use it to fund a vacation, finance a wedding, or pay off your credit card dues because the interest rate on personal loans is lower than the interest rate on credit cards. You could even use it to kick-start a venture of your own.

Benefits of a personal loan

Most lenders do not ask why you want to take the personal loan. There is only a small stipulation here: You should not use the loan for speculative ventures, gambling, or criminal activities. Also, keep in mind that personal loans are largely unsecured. This means the risk to the lender is higher. So, the interest rates on these loans are higher than for other asset-backed loans. The rates usually range between 11% and 22%.

Do you wish to reduce the interest rates on a personal loan? You can always offer an asset that you own as security. This could be a physical asset, such as your house or gold. It could also be a financial asset. An insurance policy, fixed deposit receipts or mutual fund units can all work as security.

It is easier to get a personal loan than any other loan. Your salary and your CIBIL score are two of the key factors here. They play a big role in the assessment of your creditworthiness. If you can satisfy the lender on both these counts, your personal loan is likely to be sanctioned quickly.

How to make the best use of a personal loan

1. Use a personal loan to consolidate your debt portfolio. Say, you have several short-term loans in your portfolio. Some of these may be from credit cards. You could take a personal loan and combine all these loans into a single medium-term debt. One advantage here is that you can negotiate better interest rates than what you are paying at present. A second advantage is that it will improve your credit rating and credit score. Having too many high-interest debts reflects poorly on your credit record.

2. Fund a big-ticket purchase. Suppose you want to replace all the furniture in your house. Or, perhaps you want to buy the latest iPhone. You could opt for the credit card EMI scheme offered by the seller. But there is a better option: Why not take a personal loan and pay the seller in cash? Avoid making a big buy with your credit card unless the scheme is an interest-free one. Remember, a credit card payment comes with a whole lot of other charges. All of these are loaded onto your basic cost. Before making a choice, make sure to compare the costs of taking a personal loan or using a credit card. Work out which one would be cheaper.

3. Pay for a medical emergency. During a medical emergency, a personal loan can be useful. It gives you the necessary funds quickly. Is the interest rate too high for you? Think about providing collateral and opting for a secured loan. Your insurance policies and mutual fund units will help you get the loan at a much lower rate.

4. Improve your credit score with CIBIL. Do you have only credit card debt in your portfolio? Keep in mind that this is short-term debt. Taking a five-year personal loan improves your debt profile. It creates a better mix. Financial institutions then see you as a stable creditor who can cope with a long-term financial commitment. It works in another way too. With a personal loan, you can lower your credit card spends. So, you would have a low credit utilisation ratio. This would help your credit score.

5. Fund your education needs. Use a personal loan to finance your children’s education or your own higher studies. You may wish to do a part-time MBA course to enhance your career prospects. Take a personal loan to pay for the course. Having a loan to pay off could spur you to do your best. After all, you would want to ensure that you get your money’s worth.

A personal loan makes your life easier in many ways. It gives you access to funds that you need right away. Even the lender does not ask too many questions. All you need to do is fulfil the personal loan eligibility criteria.

But you need to keep some things in mind while taking a personal loan:

- Do not overextend yourself. Ensure that your future cash flows will allow you to make the repayments on the loan.

- Before you take a loan, it is imperative that you do your research. Look at the terms and conditions of the loan as well as the best rates. Learn to read and interpret the fine print. If you are not sure of something, ask the bank or company representative to explain it to you.

The goal is to make the personal loan work for you. You should not end up straining yourself to repay the loan later on. Always keep your financial capability in mind when opting for a personal loan.

As interest rates have seen a significant drop, it is a good time to seek a personal loan. Check out lenders like Bajaj Finserv who offer instant approval on personal loans at attractive interest rates.