Personal loan is one of the easiest and quickest means of raising capital without too much of documentation required. But due to its very nature of being unsecured the interest rates on personal loans are the highest as compared to other forms of loans and credits. Thus one must dwell deeply on the circumstances in which taking such a costly loan is justifiable. There are certain unavoidable situations which warrant taking a personal loan even at a higher overall cost but at many times availing a personal loan can be avoided or substituted through other means and loans.
When is a Personal Loan Justified?
Settling High Interest Debts or Credit Card Dues: It is financially sensible to take a personal loan and settle an outstanding loan that has a high rate of interest as compared to the personal loan. Loans from local money lenders or from market sources are some loans which have a high rate of interest and can have grave negative consequences unless paid off in time. These loans can be settled through the personal loan route. Credit card dues are charged penal interest of around 45% annually if not paid in time. Additionally these outstanding dues hamper credit ratings and thus should be cleared off through a personal loan.
Seizing an Opportunity in Creating Assets: At times opportunities in terms of real estate or other kinds of assets present themselves when one is least prepared with that kind of money. Taking a personal loan to acquire such a property through a personal is a good idea. The money can be raised subsequently or the loan paid over a period of time while the asset has been acquired at a smart price. Some times when one is short of funds while making the down payment for house or piece of land getting a personal loan to make up the deficit is an acceptable move that is justified.
Enhancing personal Qualification: Taking a personal loan in order to enhance personal skill and qualification is a good idea since directly improves your employability and earnings at a later stage. Getting a degree or certificate in some specialized or vocational sphere through a personal loan helps building capacity.
When is a Personal Loan Not Justified?
Speculative Investment: Taking a high interest personal loan for investing unsecured and speculative instruments is financial foolishness as any loss in the investment would get compounded as added interest on the personal loan.
Purchase of Car: Any asset whose value is likely to depreciate is not a suitable option for personal loan financing. The car can be bought through specially intended car loans which have lower interest rates and longer repayment tenure as compared to the personal loan.
Paying off Another Personal Loan: Paying off one personal loan with another is sure way to land up in a debt trap as the amount of outstanding credit doesn’t reduce but the borrower ends up paying interest and processing fees for these loans.
Livelihood and Consumption: One should avoid availing a personal loan to meet day to day livelihood expenses. The repayment of such loans will then become difficult and the cumulative interest will lead to a debt trap ultimately.
One should opt for a personal loan only when all other means of availing funds have been exhausted and the need is pressing and situational. Taking a personal loan when the need is not justifiable or other means are available creates tremendous amount financial complications at a later stage.