10 years ago, when you needed a loan, you had to go to the bank, fill forms, give documents and go through the whole grind. And the worst part was that it took several weeks before your loan got approved and several more before it was disbursed. Today, you can apply for a loan from the comfort of your home. Bank officials come home to collect documents.
Or if you are applying through BankBazaar.com, you can use the paperless-approval process to submit your documents online. You might not need to visit a bank at all. And you have your loan amount in your account in a couple of days, if not a couple of hours.
But does that mean you need to apply for a loan whenever you need some funds? No! In fact, that’s the worst thing to do, especially if you are going to opt for a Personal Loan. You must first assess if you NEED that loan. Then, choose a loan that will be cheaper. Take the quiz below to find out if you need that Personal Loan:
Based on the result that you got, read on to find out what you should do.
You Need That Personal Loan
Personal Loans come with very high interest rates ranging between 12% and 20% per year. So, you will be paying a ton in the form of interest. Always compare rates across lenders before zeroing in on the loan. Not only that, you need to check the processing fee, prepayment charges and foreclosure charges. These charges add to the cost of the loan. If you do take a Personal Loan, ensure that you pay it back as soon as you possible. Prepaying your Personal Loan can help you save thousands, literally! Consider this: You can save Rs. 21,811 in interest if you part-pay your Rs.5 lakh, 4 year Personal Loan in 2 years. This is when you prepay Rs. 1 lakh of the loan. Interest rate is assumed as 12% per year.
Additional Reading: Personal Loan Checklist
You Can Do Without That Loan
If you have investments that you can liquidate, consider them before opting for a Personal Loan. Or do you have assets or investments you can take a loan against? Understand that taking a loan against your Fixed Deposit, Public Provident Fund and home, can work out far cheaper than taking a Personal Loan. In fact, loan against Fixed Deposit has the lowest of interest rates (usually, FD rate+2%). The lower the interest on your loan, the easier it will be to repay the loan.
You Shouldn’t Be Taking A Personal Loan For THAT!
You should never take a Personal Loan for taking vacations, buying gadgets or for leisure activities such as organizing kitty parties. Taking a Personal Loan for making tax saving investments and other investments is a big no-no. For these, you should be using your savings. Start with a Recurring Deposit. You can save small amounts every month until you have what you need. You can also consider Systematic Investment Plan (SIP) in Mutual Funds.
Now that you know when you should be taking a Personal Loan, we are sure you will use the money prudently. If you use Personal Loans for the right purpose and repay them on time, your financial health will be in the pink, always!