Thinking of getting a personal loan? Here are some tips to know before applying one
Do you know that disbursements of personal loan have increased at an alarming rate since the past several years? NBFCs and banks, which have a lot of cash post demonetisation, have relaxed their lending conditions and applied technology to make the loan lending process easier and quicker. Some banks even have claimed for loans disbursal minutes after receiving the application. To put it in simple terms, it has become very easy for salaried borrowers like you to access credit now.
While some of you may think that a personal loan can be the answer to most of your needs, there are certain things that should be considered, in case of a personal loan. Personal loan also comes with some negatives and positives like any other product. If you are one of those consumers who want to take personal loans for your purchases, more so for the big-ticket ones, you should keep in mind certain things before sealing the deal.
What is a Personal loan?
In various circumstances a personal loan will be a viable option. So what is a personal loan basically? Certain loans are earmarked for a specific kind of purchase, like you take a car loan to buy a car, you can own a home with a mortgage loan, and you may pay your education expense with a student loan. But you can buy just anything with a personal loan. Personal loans can aid you in any kind of shortfall that the households meet while buying a car or house, further education of kids, or even for medical emergencies, among others.
There will be some lenders who will need the reason for your personal loan and what are you going to do with the money. But as long as your reason is legal and responsible, you will be at liberty to do what you want.
Personal loan might be a good idea in certain circumstances
- Consolidate Credit Cards
In case you own more than one credit card which is charged to the maximum limit, you may think of getting a personal loan for consolidation of all of them into a single monthly payment. A very crucial and appealing point for you in this case will be that you may have to shell out a lesser amount than your credit card bills. The interest rate on your personal loan can be quite lower when compared to the APRs or annual percentage rates applied on your credit cards. The risk factor involved here is that you may feel very relaxed of your new credit limits and may tend to burden your credit card, even before the loan is repaid.
- Refinance Student Loans
If you are a student with a student loan on your head, refinancing the student loans can offer you some financial relief. Suppose you have availed a student loan at an interest rate of 7.0% or higher, the interest rate on your personal loan may be lower as per the type of loan that you had availed. So you can now pay off your education loan faster. But some issues are involved here. Education or student loans usually come with tax advantage benefits. You can lose the option for deduction of your interest payments when you use a personal loan to pay off some portion of your student loan during filing your income taxes. If your balance amount of the loan is sizable, a personal loan may not be able to repay it completely. So you must think through all these issues before deciding to refinance your education loans.
- Finance a Purchase
You may also finance your lump sum purchase, depending if it is a need or want. In some cases you may think of getting a personal loan at a lower interest rate and pay off the seller in cash, as it might be a better deal than using a high-interest credit card or financing with the seller. Importantly do not decide to finance on the spot ever. Always inquire the seller about their offer and then compare it with what you can get with a personal loan. Then you can make your choice depending on which case you need to pay less.
- Pay for a Wedding
For any large event like wedding ceremonies you may end up placing all the associated charges on your credit card and might not be able to pay off within the given timeline. But for a huge expense like this personal loan can save you a substantial amount on the interest charges levied, but first and foremost it should have a lesser rate than your credit card.
Pros and cons of a personal loan:
A personal loan is multi-purpose or ‘Jack of all trades’ loan as it is a good bet for financing your dreams. Lenders offer it for any kind of legitimate purpose. Other loan products are fixed on the kind of use of money, but with a personal loan you may get anything you wish, from a holiday to buying a new TV or phone, paying tuition fees, refurbishing the house, etc. Personal loan offers adequate loan quantum and you get an amount that satiates a specific requirement. Banks or lenders are ready to pay the quoted money, subject to some conditions of course. A personal loan is very beneficial in the sense it has lowest processing time, no security requirements, simple documentation and flexible term.
While personal loans can solve many of your financial problems but some disadvantages of personal loans are high processing fee, strict eligibility criteria, repayment rigidity and others.
One smart option to deal with a specific financial need is a personal loan, but you need keep in mind the pros and cons related to it so that you are not in a soup in future. These loans may be really useful in the right circumstances, but make sure you consult with some dependable financial institution and measure your options.