Personal Loan is an unsecured loan one can avail of at reasonable rates, without any restriction as to what the amount can be spent on. The approving bank or NBFC gives you the loan amount directly and you can choose to use it for education, wedding, house repairs, vacation, or any other personal emergency.
Some of the main situations in which a personal loan comes handy are listed below:
Swiping versus Signing
Swiping your Credit Card might be tempting because of the ease of transaction, however, it might turn out to be expensive. The interest rate (APR) associated with a credit card can go up to 50% in case of default. Furthermore, this interest keeps on adding to your dues on a daily basis until you repay the whole amount. This could mean a considerable amount of interest and penalty dues.
Comparatively, personal loans can be availed at 15-16%, lower if your credit score is high enough.
Stop the Debt Spiral
Paying the minimum amount keeps the ‘defaulter’ title at bay. It, however, does little to keep you from plunging into further debt. Paying anything less than the total outstanding amount attracts the APR associated with your credit card. Although you are not considered as a defaulter, the amount you owe keeps compounding on a daily basis. Consolidating your credit card dues into a personal loan can bring down the interest rate on your outstanding from the range of 36-48% to a manageable 16-18%. This rate might be slightly higher than a fresh personal loan but would be a welcome change compared to the high APR.
Pre-seed Funding for Self-Employers
Business loan for an individual could be difficult to raise especially in the initial period. At this stage, the income, earning potential, repayment propensity are all in the books, but that might be enough for the bank to approve your application for a business loan. Personal loan on the other hand comes without any conditions of ‘end-use’ attached to it. Personal loan also does not require you to offer any asset as security or to have a guarantor. This helps in avoiding the fear of losing the asset and accountability to friends and family, in case the business venture doesn’t work out.
Downpayment for Home/Car Loan
Secured loans like home or car loans usually come at lower interest rates compared to unsecured personal loans. The lender, however, requires you to put in a downpayment at the beginning of the term. A higher downpayment reduces your interest burden in the long run. Personal loan comes with a shorter tenure which helps since the longer the tenure, the higher is the compound interest.
Interest Deduction while Tax Calculation – When the amount availed as personal loan is used to invest in your business, the interest portion of your EMI can be claimed as a tax deduction.
Impetus to your Credit Score
Diversity of credit facilities implies that you can manage your finances skillfully. A healthy credit mix is thus a key factor in calculating your credit score. It accounts for nearly 10% of the changes to your credit score. Overdependency on a single type of credit can be detrimental to your score. Signing on a personal loan, rather than adding the amount to your credit card, could bring in that diversity, and improve your score.
Points to remember before applying for a Personal Loan
- Check Your Credit Score: Higher Credit Score gives an excellent vantage point to negotiate from. You can get a loan at a lower interest rate and more agreeable terms, like, waiver of processing fees, quicker approval, etc.
- Check with Your Bank If you are eligible for a Pre-approved Personal Loan: This will reduce the chances of rejection of your loan application which can hamper your credit score.
- Invest Don’t Speculate: Availing a personal loan, to invest in a business or asset is recommended, just make sure the returns are not volatile. Avoid borrowing to invest in the equity market with hopes of higher returns. A bear hug would leave you with loss and compounding debt.
‘Interest on debt grows without rain’, is a Yiddish proverb, and something you should keep in mind before you borrow.
If you need help deciding whether a personal loan is the right choice for you right now, feel free to reach out to our Debt Counsellors, we help you get better at credit management.
