Personal Loan: How You Can Make the Most of It

There are times in life when you need extra cash to meet an immediate goal. In such a case when you have considered all other options such as taking help from friends or relatives and have not found a way out, dipping into your savings pool may not be a good idea at all.

Under such circumstances, many of us consider taking a personal loan. However, despite telemarketers chasing you almost daily offering personal loan schemes, getting a personal loan isn't child's play.

Just like any other type of loan, here also your loan eligibility will depend upon your Cibil score. A personal loan - as the term suggests - can be taken to meet a number of personal financial goals. Personal financial goals can be anything from a medical procedure, home improvement, own wedding or a sibling's to urgent purchases relating to a small business. Sometimes people also opt for personal loans to refinance or consolidate a debt demanding a higher rate of interest.

But have you ever really thought as to which situations can be best handled with a personal loan? Let's consider some instances and analyse how one can use this powerful instrument effectively:

Refinancing or consolidating debt

It may theoretically seem easier to pay off credit card bills with a personal loan, but one should always remember that by doing so, you are only moving your debt pile from one place to another.

You should, therefore, consider taking a personal loan only if by doing so you would be lowering the annual rate of interest you are paying.

For instance, the rate of interest on a personal loan can vary from 13.99 per cent to 23 per cent depending upon the lender you pick and your Cibil score. This is considerably lower than an annualised rate of interest of 35 per cent in case of credit card if you have managed to get yourself in the minimum amount payment cycle and are not making repayments towards your principal amount.

You may also consider taking a personal loan if you have an outstanding amount on more than one credit card and wish to consolidate all payments. It is much easier to concentrate on one loan payment rather than managing several repayments causing sleepless nights.

Home improvement projects

You may think of taking a personal loan to make substantial changes to your home, but instead of taking a personal loan, you may consider taking a loan from a bank. Most lenders have a home improvement loan product or a renovation loan under which they finance 80-85 per cent of the total cost of renovation being undertaken. The lending rates for such loans up to an amount of Rs 30 lakh range between 10.5 to 11 per cent while loans above Rs 30 lakh are available at an interest rate ranging between 10.75 per cent and 11.50 per cent.

Medical expenses/business purchases

If you need money urgently for a medical procedure for yourself or someone in the family you are better off depending on your medical insurance. These days most hospitals offer cashless facility, so coughing up a lot of money on an immediate basis is no longer necessary.

You should, however, not neglect this aspect and take adequate medical insurance cover well in advance. As for a business purchase, it is a judgment call that you need to make, but do consider taking a business loan from a bank prior to opting for a personal loan. There are several loans available for SMEs today that may offer you better financing and repayment options.

Weddings and vacations

There is no doubt about the fact that a wedding or a vacation can be cause a huge financial burden. While it is true that you will pay a lesser amount of interest as compared to a credit card, it is better to save up for such expenses well in advance rather than pay for them with a personal loan which is an unsecured debt at the end of the day.

CONCLUSION

Personal loans are definitely a lucrative option and relatively easy to procure these days, but it only makes sense to take one in case of an unavoidable and immediate need for money. The other instance when you can consider taking such a loan is when there is an opportunity to save money on interest rates.

Otherwise, if it is that designer outfit, a diamond ring for your wife or a fancy trip with your family that you want desperately, it's better to save up for it rather than pay interest on the purchase.

Disclaimer: All information in this article has been provided by Creditvidya.com and NDTV Profit is not responsible for the accuracy and completeness of the same.