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In certain parts of India, even the idea of borrowing money invokes deep fear, tarnished by stories of years of servitude in an attempt to pay back the debt. For most Indians, the situation has improved by leaps and bounds now thanks to the concept of ‘Personal’ loans. Technically, all loans lent to one person is personal in nature. But personal loans capitalize on the fact that these are the easiest loans to avail. Banks will buy precious advertisement spaces across mediums to tell you how easy it is to avail a personal loan from their nearest branch.
But if a loan is this easy, there have to be some pitfalls right? Yes and no. Sure, the rates of interest are high. They are almost always in double-digits and often in mid-teens. But when you are in a crunch, would you rather address your biggest concern or worry about the rate of return?
A personal loan remains the safest, cleanest and fastest ways to repay someone or if you need money in an emergency. Since there are no collaterals needed, the loan becomes the easiest to avail. Of course, it is not as simple as asking a bank executive for money. You still need to have a minimum and regular source of income and a basic credit score of at least 750. A lower score would mean a higher interest rate. If you have little time to check for loan rates and negotiate the same, the safest bet would be your bank. They would have your entire banking history, and won’t need any more documentation since you would have completed your KYC.
However, remember that a personal loan should be the last, and never the first option. Just like how unpaid credit card loans can wreck your credit history and borrowing power, the failure to pay personal loan can have the same impact. No one gives money for free, and no one spares you for not paying back in time. Banks are happy to lend on the condition you pay them back.
If you want a large amount and are unsure about when you might get the money to pay the loan back, it is far better to dip into savings first. Sure, it will hurt to undo years of careful financial saving, but remember: this is your money. Take, for example, a fixed deposit you were keeping to use after two years. If you break it now, you may have to pay a small penalty or lose out on earning a higher rate of interest. However, the loss you make will be a pittance in comparison to the rate of interest on a personal loan The same goes for your Public Provident Fund (PPF). Although the term of the PPF is 15 years, you can borrow a lump sum after 6 years. The point here is simple: dip into your savings before borrowing money at a high rate. Earning 10% on an investment will matter little if you are 15% for a loan.
But this does not mean that personal loan is always a sure shot way to falling in an abyss. On the contrary, it can be a god sent if there are a few factors that are in your favour.
For example, say you are a freelancer who needs to pay someone by the 15th of the month. The repayment for a personal loan can always be adjusted to suit your needs, so speak to your bank. Tell them that you expect your money by, say, the 25th of the month. Ensure your EMIs start after that date. Similarly, if you want to buy something immediately and do not want to pay using your credit card, a personal loan is a good option. A personal loan can also work to your advantage if your monthly income is at part with the repayment rates/EMIs. For example, say, you need Rs 60,000 but have a monthly income of Rs 30,000. The amount is not very high and if you have to pay, say, Rs 6,500 for 11 months, you can surely manage it as long as you are prudent in your savings and cut corners to repay the amount.
Just make sure you repay on time and never fail on your payments. If you do this well, this will improve your credit score and help you borrow later at a better rate.
Discipline is a rare virtue and even rarer as a practice. The problem, however, is not with the nature of the personal loan. It is with people’s inability to adhere to a process of repayment over some time. If you are sure you can pay the same, a personal loan is the best option for you. But again, remember, see it as a last resort and do not make a habit of the same. If you are spending more than you earn and are in debt, what you need is better financial management, not a friendly bank executive offering you easy money at ‘attractive’ rates.