When not to take a personal loan!

By BankBazaar.com | November 17, 2009

You can obtain a loan against the surrender value of your life insurance policy from the insurance company or from a bank or obtain a loan from your provident fund account if you have had an employee provident fund account for more than 5 years. The interest rates would definitely be lower compared to the personal loan interest rates.

Whenever people have a requirement for some urgent cash and cannot come up with the amount needed with the resources they have, they inadvertently apply for a loan from a bank. Getting a loan today has become very easy, what with the stiff competition prevalent among different banks. The easiest to get among the plethora of loans available are personal loans.

Personal loans are easy to get and has its pros and cons:

Pros

  • No collateral – Unlike other types of loans, you don’t need to produce any collateral, or security, to avail of a personal loan
  • Can be taken for any reason – Normally a personal loan is just that – for personal use. Once you satisfy the loan eligibility, the banks give you the loan irrespective of how you put the money to use
  • Minimal paperwork – banks normally do not ask you for more than a few critical documents for approving a loan


Cons

  • Strict qualifying criteria – because of minimal paperwork and no security, qualifying for a personal loan is a strict affair
  • High interest rates – the interest rates for personal loans are very high and second only to the extremely high interest rates charged by credit card companies for credit card cash advances
  • Lots of fine print – the loan agreement has a lot of clauses in fine print, which one needs to understand thoroughly before opting for a loan

When is it okay to take a personal loan?

  • Paying off your credit card dues – personal loans make sense when you have to pay off huge outstanding amounts on your credit cards. The interest rates charged by credit cards are very high, sometimes amounting to 45% per annum. Therefore, taking a personal loan to pay off the credit card turns out to be a good option to reduce the amount of interest you pay.
  • An urgent requirement for cash – because of minimal paperwork, getting a personal loan is a fast process. So if you are really in a tight spot and need some urgent cash to bail you out, personal loans make sense

It is important to understand that personal loans are a good option only if the amount you require is not very big and your monthly budget can easily fit in the added EMI expense. Exercise the option of taking a personal loan, only because you have no other option and it is possible to pay it off in as less a time frame as possible to help you save on the interest cost.

When is it not okay to take a personal loan?

  • Financing the home improvement – in case if you are looking for doing some repairs to your house, opting for a personal loan is not necessary. You can do these repairs with a home improvement loan
  • Buying a car – if you are buying car, a car loan would take care of your needs. You do not need to take a personal loan for that
  • Speculative purposes – Never take a loan to invest in stock markets or other speculative purposes. This is nothing short of a gamble where you might lose out the money invested. Shot term speculative investments are not a wise option to use your money for especially in the instance of having to opt for a personal loan.

Alternatives to a personal loan

Loan against property is a good option that can provide you loan at lower interest rates to the tune of 3-4% lesser. The loan is available at a certain percentage of the property’s market value, usually around 40%-60%. LAP interest rates are cheaper by 3% to 4% compared to personal loan rates.

You could also utilise any investments you might have made so far, like shares, securities, fixed deposits, gold, insurance policies etc. You can pledge these as collateral and obtain a loan against them. For instance, you can obtain a loan against the surrender value of your life insurance policy from the insurance company or from a bank or obtain a loan from your provident fund account if you have had an employee provident fund account for more than 5 years. The interest rates would definitely be lower compared to the personal loan interest rates.

So before you decide to go in for a personal loan, check alternatives with lower interest rates. A personal loan may be easy to get but does not necessarily become the best solution.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

15 thoughts on “When not to take a personal loan!

  1. AvatarArun

    Excellent article. Many people esp. youngsters today go in for personal loan without even thinking about its implications. I know a dumb ass who took personal loan to buy some land in a village!! The entire transaction was funded by the PL I guess.

    Reply
    1. AvatarManivanan

      Hi Arun,

      I think ur a dumb ass cos the guy who bought land in his village with a PL must have made good returns by now. start using ur brains

      Reply
  2. AvatarVikas

    Tough u have said that for car loan, we are shall not bother to take a personal loan. But i have seen instances that HDFC provides used car loan @ 18.75% on reducing balance method
    and at the same time personal loan is offered to me at 15% reducing balance ?? Then tell which is the better option ??

    Reply
    1. AvatarAmrit

      Vikas ,

      HDFC is a major fraud , do not give in to their ways. make a proper study of the market.

      Though HDFC provides car loans comparatively easily , they fleece you in interest rates.

      I am a victim because I did not study current rates for car loans at the time when I bought my new car , as I was away from the country . I banked on HDFC because my old car was also financed by them . I later found out that they sold me the loan @ 14.75 % for a new car , whereas the market was offering 11 – 13% . But it was too late , the car was ready for delivery when I discovered this.

      So be careful and study all banks. Do not become a victim of trust , specially with HDFC.

      Thanks.

      Reply
  3. AvatarApplyCreditCards

    Hi, cool post. I have been wondering about this topic,so thanks for writing.

    Reply
  4. AvatarCrisBetewsky

    Your site is worth beeing in the top cause it contains really amazing information.

    Reply
  5. AvatarAnil Modi

    Loan of any type is a curse, may it be for business, personal use, house, vehicle or education. Takers are only unfortunate and nothing else. As per the natural principle fortunate can only be one who has the ability to give as is THE MOTHER NATURE. Takers seldom care of the burden of interest leave aside the principle which too they do not intend to pay.It is basically the vagary of the day that all, including the government, is promoting the habit of begging and borrowing.I wonder whether we would ever be able to get rid of this disease.Today majority of the people live under debt which is unwarranted but they create it either because of psuedo-comparision or easy availability.It would have been all the better if the government makes policies and efforts of providing free education and nothing else because only that will be able to develop persons of productivity and uprightness.May the almighty save us all.

    Reply
  6. AvatarAmar Kulkarni

    Nice article. I had taken a personal loan at the age of 24 to pay off the huge credit card debts I had, avoid personal loans if you can is my advice.
    The process is very simple but the repayment sometimes puts you under alot of stress. Also all banks charge a penalty if you want to foreclose your loan. So its like icing on the cake for banks. They recover the interest from you first & in the latter stages charge you penalty as well for paying off the loan. Smart buggers!

    Reply
  7. AvatarHiren Gosalia

    Excellent article! I'm just outta under grad coll. & am working out my financial plans while being on a job…this seems to be useful advise…thanks author:-)…Cheers!

    Reply
  8. Avatarpremchand

    I agree with Anil Modisays:July 13, 2009
    Loan of any type is a curse, may it be for business, personal use, house, vehicle or education. Takers are only unfortunate and nothing else. As per the natural principle fortunate can only be one who has the ability to give as is THE MOTHER NATURE. Takers seldom care of the burden of interest leave aside the principle which too they do not intend to pay.It is basically the vagary of the day that all, including the government, is promoting the habit of begging and borrowing.I wonder whether we would ever be able to get rid of this disease.Today majority of the people live under debt which is unwarranted but they create it either because of psuedo-comparision or easy availability.It would have been all the better if the government makes policies and efforts of providing free education and nothing else because only that will be able to develop persons of productivity and uprightness.May the almighty save us all.
    OR
    loan is good for those peoples who nerver think of repayment because later or sooner govt will pass for waver of loan.
    If you want to make pre payment it is penable better not to pay or settel when the bankers came with folded hands and than sattel for samall amount.

    Reply
  9. Avatarj.premkumar

    for many who are ignorant of loans the advice is very usefull

    Reply
  10. AvatarAnant Gaitonde

    In case you have Bank FDs. Pledge them and take Loan from same Bank. The rate of Interest is 1% more than your FD rate and you can get upto 90% of the FD Amount (Negotiate otherwise they give upto 80% and charge 2% more). I have done this in the past So effectively if FD rate is say 8% you earn Rs 80 on Rs 1000 and pay 9% on Rs 900 or Rs 81.00. Effectively you pay just Re1/- and get liquidity of Rs 900. Can anything be cheaper than this? There are several ways to make money outside stock market also.

    Reply
    1. Avatarankur gupta

      Please make me understan how it works…. lets say i do a fd for 5 lakhs… and take personal loans for 4 lakhs…for 10 yrs tenure… so on monthly basis i dont pay anything… after 10yrs do i after to return 4 lakhs of personal loans …..to free my FD.

      or personal loan is paid off …..

      Reply
  11. AvatarAnant Gaitonde

    Dear Ankur,
    Your FD with a Bank and Loan from the Bank are two seperate deals / contracts or transactions and hence look at them seperately.
    Generally bank advance upto 80% (90% if you negotiate hard) of the FD amount as Personal Loans (if you request) with a differential rate of 2% (1% if you bargain/ negotiate very hard). Suppose your FD for Rs 5.00 lacs is @ 8% p.a., you can apply for upto 80% i.e. 4.00 lacs. Bank will charge you 10% p.a. As long as you are using the loan, Bank will charge you Int on Monthly basis on the balance o/s and pay you Int half yearly or quarterly. If you have used the full Amount, Bank will pay you 40,000 every year and charge you 40,000 every year. The FD will be automatically renewed on maturity if the loan is outstanding. if rates are revised, the FD Rate and the Loan rate will be revised accordingly maintaining a difference of 2%.
    After 10 years, your Loan is still o/s as you did not service the loan and the interest was adjusted against the Int due to you on the FD.
    Now if you want your FD amount of Rs 5.00 lacs back, you need to repay Rs 4.00 lacs or can ask the Bank to adjust the loan against FD amount and get Rs 1.00 lac. Subject to penal charges or Diff rates if the FD is withdrawn pre maturely.
    Hope this answers your question. I have ignore the Int that you may need to pay due to timing diff of Loan Int (charged Monthly) and FD Int (paid by Bank Half Yearly or Quarterly)
    Regards
    Anant Gaitonde

    Reply

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