When to use a personal loan and when to avoid it

It’s always better to remain debt-free by managing your money well to keep the expenses within the earning level. However, for acquiring long-term capital assets – like land and building, car etc, where big investments are needed – one may take loans, provided EMIs may be paid comfortably from the monthly earnings.

Loans taken to purchase assets also include secured loans, like a home loan, which are cheaper than the unsecured loans.

However, anyone may face financial difficulties in life and may need loans – like a personal loan, credit card loan etc – to get out of the rough water.

“Personal loans are unsecured ones that require no collateral. Nowadays, they are available digitally without having to go through the rigorous process that one endures while trying to avail of secured loans. While secure loans provide lesser interest rates and secure loans with a mandatory requirement of collateral, employment history, a good credit score and the ability to pay back, personal loans come with slightly higher interest rates and a less rigorous process,” said Anil Pinapala, CEO & Founder of Vivifi India Finance.

“Personal loans are available in banks or NBFCs like FlexPay, FlexSalary, etc., and can be used for almost any personal financial needs like making purchases, payments on home renovations, down payments for cars and at any time that you fall short on cash. The limit for the same is Rs 2-5 lakh and can be secured to meet personal needs. Most people split their loans into monthly installments to make repayments promptly,” he added.

“When your everyday expenses increase beyond your income, or you face untimely and unexpected expenditures, personal loans come to the rescue to provide you with the financial stability to overcome the cost-related issues,” Pinapala further said.

As unsecured loans are expensive, one should be very particular for what purpose he/she is taking such loans.

According to Pinapala, one can use personal loans for different types of spending such as:

• Bills and daily expenses: When the salary drains out mid-way along the month and the bills are yet to be paid, personal loans can not only help you meet those expenses but also give you the flexibility to repay them conveniently without stifling your monthly budget.
• Emergencies: Situations like medical emergencies are unpredictable. Personal loans ensure you are not stranded for cash during these times.
• Consolidation of minor loans: When people have taken smaller loans with high interest, a personal loan can be used to pay off those loans and avoid paying greater interest rates.
• Festival and family functions: The celebration of festivals, weddings, and other functions in a multi-cultural country like India call for extra expenses that may be difficult to cover with a monthly salary alone. A personal loan can help with those expenses while allowing you to repay the loan later in installments too.
• Tuition fees: When people work and support education costs as well, personal loans can be helpful to provide for their tuition fees as it provides flexibility in repayments, without affecting the individual’s financial goals as well.

“While personal loans are beneficial for many reasons, they must be responsibly utilised to meet immediate personal needs,” said Pinapala.

However, a personal loan should never be used for the things that you don’t need, but just want to have for luxury or any such purpose.

Pinapala provides some of the reasons, explaining when to not use a personal loan:

• Gambling: Taking a personal loan for gambling is illegal and may not be advisable as a person’s winning or losing money is uncertain. The price of gambling away personal loan money is steep and must not be used for illegal and criminal purposes as it is a punishable offense.
• Personal loans are not an alternative for savings: Short-term personal loans may be taken to restructure unexpected debts and manage expenses until your next salary. But it cannot be replaced as an alternative for regular savings. It is important to remember that personal loan rates are nominal but higher than secured loans. Repayment can become an expensive affair if you lack the discipline to clear your debts in time.
• A personal loan for business investment in the stock market may be a bad idea: Getting a personal loan to invest in the stock market and other such businesses may not be wise as the outcomes of such investments or businesses are not certain, and it may leave you at a loss and stranded for money. And you may incur the interest rate of the personal loan as an additional expense.

“It is good to be aware of personal loans offered by the banks and NBFCs. Fintech platforms like FlexPay, FlexSalary, etc provide instant cash and line of credit, which can be availed to meet all personal expenditures. Knowing that you are eligible for a loan might provide a sense of security at times when you fall short of funds in the middle of the month. However, avail personal loans only when in need as they can become an expensive affair if not managed well,” said Pinapala.