There are lot of articles on personal loans.
Why do you
require personal loan?
First ask yourself whether you really require personal loan. A
loan is required as you don’t have sufficient cash to meet immediate
expenditure.
So you have to analyse why
is this expenditure required? Is this important? Can you do without this
expenditure?
If this expenditure is necessary, then why can’t you raise your
income to have sufficient cash?
There are certain expenditures made on emotions like buying a car,
Mobiles by taking personal loan. I would advise you to wait till you accumulate
that much cash and buy that on cash instead of loan.
Also there are emotional decisions which are made by some of the
husbands and the consequences have to be paid by the entire family like
marriage expenditure of brother/ sister even though sufficient funds are not
available. They take personal loan and then their wives and children have to
suffer the burden of EMIs.
So if you can’t afford it, it is better to say no than to suffer
the consequences of EMIs
I feel personal loan is justified is taking that for medical
expenses, or for incurring an expenditure which will increase the future
income.
Personal
loans are one of the easiest that a borrower can take. Its biggest benefit?
There are no questions asked, no proof demanded, no criteria to be met. This is
unlike other loans, such as those for education, where you need to show proof
of admission, or a home loan, where the house is used as security. While every
bank provides personal loans, financial experts, including loan providers and
websites, advise borrowers against taking these. Why?
The primary
reason is that these are one of the most expensive loans as the interest rates
vary between 16% and 30%. The extremely high interest rate is justified because
the borrower doesn't need to provide a collateral. The amount of loan is
calculated by taking into consideration the current financial status of the
borrower and his cash flow, such as salary, rental income, profit and loss in business,
servicing of other loans, etc.
But if the
product is so maligned, why does it exist? Can taking a personal loan be
beneficial? Yes, it can, depending on the circumstances of the borrower. Here
are three situations which justify taking a personal, provided there is no
other option available, such as borrowing from parents or friends.
Settling
a debt which has a high interest rate
If you are
repaying a loan that has a very high interest rate, while that of the personal
loan is lower, it will be better to opt for the latter. You can use the
personal loan to close out the higher interest debt. For instance, at times,
when people require cash urgently, they borrow a small amount from money
lenders, where they only pay the monthly interest and promise to pay the
principal at a later time. This interest is usually on the higher side ranging
from 1.5- 3% a month. If you can repay the principal in less than six months,
you can keep paying the interest on a monthly basis. However, if you will take
longer to repay the principal amount, it is better to go for a personal loan
and use it to settle the earlier loan.
Say, you
borrow Rs 1 lakh from a money lender for your sister's wedding. The interest is
Rs 2.5 per Rs 100 a month (2.5% interest a month), which means you will have to
pay Rs 2,500 every month as interest. In a year, you will pay Rs 30,000, while
the principal would still be Rs 1 lakh, so your effective outgo will be Rs 1.3
lakh.
In such a
case, you can take a personal loan to repay the money lender. A loan of Rs 1
lakh for two years at 18% a year means an equated monthly instalment of Rs
4,992. After two years, you would have not only paid off the entire loan, you
would have paid only Rs 19,818 as interest, much less than the Rs 30,000 you
would have paid the money lender as interest for one year.
Also, as a
personal loan is with a bank, you get the opportunity to create a good
repayment record which will, in turn, create a good credit history. You can
leverage this later to get higher loans at lower rates.
Paying
off a large credit card balance
A personal
loan can also be used to pay off a substantial credit card balance that is
being rolled over for months. Paying just the minimum amount on the card bill
will not help you as the interest is charged over the total bill amount and is
very high, usually 2.5-3% a month. It's better to divert the money to paying
the EMI of a personal loan. You could save 16-30% depending on the rate of
interest you are able to get on the loan.
Suppose,
you have been on a shopping spree and spend Rs 2.3 lakh on your credit card.
You may be unable to pay this large amount in one go and could pay the minimum
balance every month. However, after six months, you will still have a balance
of Rs 2 lakh. To clear this amount, you can use the following options—continue
to pay the minimum amount every month, pay a fixed sum every month or take a
personal loan.
If you pay
only the minimum amount (5%), it will take you 350 months to clear your bill
and the total payout will be approximately Rs 4.78 lakh. If you choose the
second option and pay Rs 10,300 as a fixed amount every month, it will take you
30 months to settle the debt. In this case, the total outflow will be Rs 3.09
lakh. The best choice is to take a personal loan of Rs 2 lakh and settle the
card amount. If the interest rate for the loan is 18% a year, the EMI for two
years will be Rs 9,985 and your total payout will be Rs 2.40 lakh.
This means
you will save Rs 2.38 lakh over the first option or Rs 69,000 over the second
one. Also, paying the minimum balance on the card will require around 30 years,
while taking a personal loan means you will be debt-free within two years.
Another benefit is that as the card balance will have been paid, you can
continue using it to pay for purchases as well as to withdraw money in case of
an emergency.
For
higher education
The third
scenario when taking a personal loan could be considered good is for higher
education. This will not be helpful at the graduate level as the duration of
the course will likely exceed the loan repayment period. Also, the chances of
getting a high salary to compensate for the interest outflow is lesser.
This is
more useful for a professional course. The personal loan can be utilised in
situations where you need funds quickly and cannot provide proof of admission
on time, when you need more funding or if you do not want to pledge collateral.
However, take this route only when you cannot procure an education loan or if
you need to top up the funding.
The reason
why this is a good option is that education is an asset which will provide good
returns throughout life. The price to pay for this is the interest paid on the
personal loan and, probably, a simple lifestyle till the loan is repaid or you
land a lucrative job offer.
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