Personal loan is one of the fasted growing loan product in India with 15% annualized growth rate. Banks and NBFCs have become very competitive at offering personal loans and targeting customers.
It could be tempting to go for a personal loan to get some quick cash for an impulse purchase but one should evaluate the cost of the loan vs other options available.
These are some of the use cases where you can consider personal loans:
Personal Loan works best. Low interest rate. Quick processing. The other option is to save up and them go on a vacation instead of spending first and then paying. You will save on the interest rate and probably enjoy the holiday better as you will be a little less stressed.
Weddings often come with a huge bill. If you are crunched for cash, personal loan is a good option. You need to be careful not to overspend as there is no upper limit to what you can spend on an Indian Wedding. Minimize your costs and take a personal loan only if you still fall short.
Home appliance loans are better as they usually provide a 0% interest EMI. The processing gets done at the store and is very quick and efficient. The appliance acts as security that the lender can claim in the event of default. The lenders have a negotiated rate with the seller and so they are able to give the buyer a 0% interest rate and still make money. You might be able to negotiate a slightly better rate with the seller if you pay them directly.
Down payment for home/car
Banks insist that you pay the down payment from your savings. They can ask you for proof of funds. If you are short of a small amount then you can take personal loan and use it for other expenses and save from your salary to pay the downpayment. Not recommended unless it is very essential and you are confident you can pay off both the loans. (Top 5 mistakes to avoid while taking a home loan)
Loans for land purchase are harder to come by than home loans. Personal loans would here just as well. The interest rate will be slightly higher but the process is much simpler and quicker.
Month end emergency
Need some cash to get through the end of month? Personal loans can help. If it’s a small amount you can take a cash advance on your credit card and pay it back at the earliest.Credit card charges on cash advances are very high and it should not be used for long term loans. There are some startups that provide salary advance and claim no charges. We haven’t had an opportunity to try them or know anyone who has but do let us know your experience if you decide to try them out.
If the costs are not covered by your health insurance, a personal loan would be very handy. You will have one less thing to worry and focus on the health of your loved ones.
Things you should never take a personal loan for
It is not a great idea to gamble with your own money. It is a terrible idea to gamble with borrowed money. Gamble only with the money you can afford to lose without hurting yourself.
Investing in stocks
This could be very tempting given the performance of our equity markets in the last year. But it could be risky as the markets will go through fluctuations. It is best to avoid using borrowed money for taking this risk.
Lending to someone else for higher interest
There is a reason they do not get a loan directly from the bank. Their credit standing must be poor. So by lending to them you are exposing yourself to the risk and putting your own credit rating on the line. It is not worth the hassle.