Personal loans are very popular as a large amount of money can be borrowed conveniently without providing any security or collateral. Easy availability, minimal documentation, and flexible repayment options make personal loans a great financing facility. A personal loan can serve many purposes such as renovation, electronic purchase, travel, education, vehicle buying, medical emergency, etc.
But before taking one, do assess your cash requirement and borrow as per your repayment capacity. It would also be wise to compare personal loans from various lenders on interest rates, processing fees, other loan-related charges like prepayment charges, etc. to grab the best deal for yourself. Using a personal loan EMI calculator to estimate your monthly repayments would also be a good idea.
Here are a few scenarios when you can consider taking a personal loan.
Consolidation of Debts: In case you are managing multiple debt repayments, you could consider consolidating them by taking a single personal loan. This way, you only have one EMI to track and pay, and your higher-interest debts could potentially become cheaper through a lower-interest personal loan. If you have a good credit score and eligible income, you can get a personal loan at a low interest rate. Loan consolidation can help streamline your dues and manage your money better.
Home Renovation: Opting for a personal loan for home improvement or repairs is common. Such a loan requires no collateral and hence is easy to obtain for an eligible borrower and can be repaid in monthly instalments. Availing a personal loan for the home construction or renovations can help you get tax deductions benefits against the interest paid. Also, you will be using a loan to increase the value of your asset.
Payment of Credit Card Bills: A personal loan can be taken to pull out of credit card debt. This should be done only to avoid paying an annualised interest rate of around 40% on credit card debt, which is higher compared to personal loan rates of 10-17%. Payment of credit card bills in full can also help in avoiding any penalties. Once you clear the credit cards in full, you may have the option to increase the credit limit as well.
Improving Your Credit Score: Availing a personal loan can improve your credit score in several ways. When you apply for a loan, your potential lender checks about your repayment capacity by checking your credit score. Availing a personal loan that you can easily repay can help you build a credit history and boost it through timely payments.
Medical Emergencies: In the case of medical emergencies, you may need funds at short notice. Then there are many medical situations such as laser eye surgery that are typically not covered by a health insurance policy. You may consider taking a personal loan for financing such medical costs. Various lenders offer instant and paperless loans for medical purposes.
Relocating: Relocation costs are steep. If not managed properly, the cost of hiring movers and packers may burn a deep hole in your pocket. Personal loans are a great option if you do not have enough money and need to relocate immediately. The funds can be used for several reasons such as the purchase of new furniture, transportation, and packing.
For Marriage: Weddings in India are often grand and costly affairs. Despite the planning, new expenses can emerge unannounced. A personal loan will help you deal with them.
Higher Education: Even though education loans are popular, they come with several restrictions. Education loans may be provided only for certain courses and for specific institutions. So, for example, if you wanted to undergo a short-term course, it may be easier to avail a personal loan to fund the expenses.
Funding a Holiday: Travel is an aspiration for many Indians. However, travelling abroad could be cost-intensive and may drain your savings. It may make sense to finance at least a part of your vacation with a personal loan which can be gradually repaid.
Opting for a personal loan is a good way to meet your sudden liquidity requirements. However, always have a plan for full and timely repayment. Before you apply for any loan, check your credit score to understand what your loan eligibility is, and also compare various offers including pre-approved ones, on parameters such as interest rate, processing fee, pre-closure, and part-prepayment charges before finalising your loan.
The author is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.
Need help in calculating your EMI? Use BankBazaar’s easy Personal Loan EMI calculator.