Personal loans are quickly processed and you have many banks and NBFCs offering these loans at competitive rates of interests. Before you apply for a personal loan, consider some factors to determine if taking a Personal Loan is the best option for you.
Personal loans offer the convenience of quick access to funds. They do not need a collateral and no questions are asked about the end user. If you have an above average credit score, you stand a good chance of having the loan application approved, and the funds made available in your account within days.
What Should You Consider Before Applying for a Personal loan?
Remember, as personal loans are unsecured loans, they do not come cheap. The interest rates may vary from 13% to 24% and above, depending on the loan amount, the credit rating of borrower etc. Unless essential, it is best to avoid getting into debt.
- The No. of EMIs You Pay
Are you credit hungry? Do you apply for a lot of loans that you are sent offers for? Are you able to keep up with the repayments on all of them? Be honest with yourself in answering these questions. Do not borrow beyond your capacity to repay. If you do, you will get into a debt trap. Avail a Personal Loan, only if you do not have too many loans in your name.
- Reason for Your Loan
Are you taking the loan to get funds for a vacation that you cannot afford? Are you planning to use it to buy a huge LED TV? First, consider whether these expenses can be put off till you have saved up enough funds. If you do get the funds through a Personal Loan, the vital question to ask yourself is can you keep up with the EMIs and not default? If yes is your answer, then you apply for a loan and fulfill your dreams.
- Taking a Personal Loan for Home Purchase
You have applied for a Home Loan and have a good chance of getting approval. However, the loan amount would not pay the whole price of the house. You will get about 80% of the cost of the house as a Home Loan. You now have to raise funds to make the down payment.
If you do take a Personal Loan for this, remember that you will be paying EMIs on at least two loans – this Personal Loan and the Home Loan. Are you sure you can afford this? Is there any other means by which you can raise the needed funds? For instance, through redeeming a part of your investments, or selling another asset?
If you do get a Personal Loan because you have the resources to make the repayments, remember to avail the tax benefits. If you can show proofs that you have used the Personal Loan for purchase or renovation of a residential property, you are eligible for tax exemption on the interest component of your loan repayment, under Section 24(b) of the IT Act.
- Debt Consolidation
If you have a lot of credit card debts and other high-interest loans, you can try and find a Personal Loan at a lower interest rate, and borrow the money to pay off those high-interest debts. You will then have only this one loan to repay. However, to get a Personal Loan at favorable interest rates, you need to have a good credit rating. Consider your choices if you are trying to get out of a debt mire.
When taking a Personal Loan, keep in mind that they come at a high-interest rate. Borrow only as you need, to meet emergency or essential expenses. Do not take too many loans at once. Practice financial discipline and stick to repayment schedule to ensure you do not get into a debt trap by trying to live beyond your means.