When to Get a Personal Loan?

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Wondering when to take out A Personal Loan. This article explains all the instances when you can apply for one.

Key Takeaways

• A Personal Loan can be taken for a wide variety of reasons.
• It is an unsecured loan, which means you do not need to provide collateral.
• Personal Loans are popular as there is no restriction on the end usage of funds.
• Loan amount can be used for debt consolidation, medical emergencies, weddings, vacations, business requirements, education fees, home improvement, etc.
• The eligibility and maximum loan amount that one can get depend on your income level, credit history, and repayment capacity.

Introduction

A Personal Loan is one of the most convenient ways of borrowing money from a bank. It enables you to fulfil their various personal needs. Often known as an unsecured loan, this is one type of loan where you primarily do not need to provide any collateral. What contributes to the popularity if the Personal Loan, is that there is no restriction on the end-use of the funds. If you wish to know when to take out a Personal Loan, this article is for you.

When to Get a Personal Loan?

You can reach out to your bank anytime you need finances for your planned and unplanned expenses. Here are a few hand-picked, common reasons to apply for a Personal Loan:

Debt consolidation

If you have multiple small loans and credit card dues from several lenders, then a Personal Loan can help you consolidate your debt. You can avail of a Personal Loan and use the proceeds to close all other loan accounts to avoid the hassles of tracking multiple payments. Also, consolidating your debt with a single loan will make it more convenient for you to manage your debt. Converting your smaller loans into a Personal Loan and paying a single rate of interest every month with a fixed instalment can prove to be cheaper for you as well. So, for instance, if you own multiple credit cards and are paying a huge interest rate on the outstanding amount, you should take out a Personal Loan and use the money to pay credit card bills and then work towards repaying your Personal Loan on time.

Emergency medical expenses

One of the most basic answers to the question when to get a Personal Loan is when you need to fund financial emergencies. The uncertainty around life and health is prominent in this day and age. One cannot rule out the chances of dealing with a medical emergency, especially when you are not prepared for it. Even if you have the best of health insurance policies, sometimes they might prove to be inadequate if certain diseases and treatments are not covered under the plans, or the extent of coverage is low, or if there is a clause on paying a certain amount out of pocket in order to make a claim. In all such cases, a Personal Loan can help you arrange some funds in a short time without much formalities and paperwork. You can send your Personal Loan application online and can possibly get the funds credited to your account within hours. This attribute makes Personal Loans a convenient tool for people in times of medical emergencies.

Business capital

Business owners and traders often witness liquidity and cash crunch issues. They may face troubles arranging funds for repaying existing loans, paying ongoing operational bills or staff salaries from time to time. They may also need funds for expanding their business operations. In all such situations, Personal Loans can prove to be extremely helpful in closing the financing gap, especially for Small and Medium Enterprises (SMEs). Even salaried employees who are planning to start new business ventures can rely on Personal Loans for some initial business capital at a reasonable cost of interest without any collateral. The best part is that since there is no restriction on end-usage, you can use the loan proceeds for any kind of business requirement – from buying machinery to marketing, or renting an office space, etc.

Home improvement

Another good reason for when to take out a Personal Loan is when you need to renovate your house. If you intend to redesign or remodel your home or if you are contemplating some home repair and maintenance work, you can avail of a Personal Loan to arrange funds for the same. Remodelling your house can add value to your property and increase its resale value. Also, you may be eligible for an income tax deduction if you take a Personal Loan for the purpose of home renovation. Under Section 24 of the IT Act 1961, any interest payable on a home improvement loan is tax-deductible for up to INR 30,000 per annum. However, you would have to prove the actual usage of the Personal Loan to renovate your property to avail of this deduction. This can be done by furnishing proper receipts of all the purchases and services availed.

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Buying consumer/home appliances

Want to buy the latest smartphone or an exciting gaming console that has just hit the markets? With the help of Personal Loans, you can immediately buy any of these products without having to wait for months before you save enough for them. You can convert your one-time expense into small and affordable EMIs spread across months.

Wedding expenses

One of the best times for when to get a Personal Loan is to fund your wedding expenses. When you plan a wedding, you need to consider many factors, starting with your wedding trousseau to the cost of buying jewellery and gifts. Then there are costs associated with catering, photography, decoration of the venue, and more. The cost typically depends on how extensive your guest list is and what you intend your wedding to look like. If the costs exceed your expectations, you can always take out a Personal Loan and choose your preferred repayment tenure.

Vacation costs

The list of reasons for when to get a Personal Loan also includes vacation costs. Whether you want to see the beautiful city of lights and love, Paris or take off on a hiking trip to Peru, a Personal Loan can come to your rescue. With the help of this loan, you tick off the many places on your bucket list. You can go for a Personal Loan for any kind of trip, be it domestic or international. Since vacations typically tend to be costly, you can manage all kinds of expenses such as transportation, accommodation, visa fees, sightseeing, meals, and more with the Personal Loan. So instead of postponing the holiday until you can save enough, you can take a Personal Loan and enjoy your vacation.

Study Expenses

Do you wish to expand your educational horizons but are worried about the expenses? If yes, you can consider a Personal Loan. Such a Loan is ideal if you wish to pursue a hobby you wish to convert into a career. For instance, you can use the funds from the loan to study photography, baking, calligraphy, or any other short-term certificate or vocational course. Therefore, if funding requirements are smaller, one can consider a Personal Loan to pay for your study expenses.

Moving to a new city

Another legitimate reason for when to get a Personal Loan is if you need to move to a new city. Shifting base to a new city can prove to be a physically, emotionally, and financially challenging experience. The cost of movers and packers is exceptionally high nowadays. And you may also have to spend some money on furnishing your new house with furniture, electronics, and more. A Personal Loan assists you to pay for all these expenses associated with moving to a new city.

To improve credit score

While thinking of when to take out a Personal Loan, this reason may not strike you immediately, but many experts keep it high on their suggestion list. For any small-ticket expenses, if you take a Personal Loan and repay all the instalments on time, you may see your credit score move higher. A high credit score of 750+ points increases your chances of getting a loan in future, that too at an attractive interest rate. So, taking a Personal Loan and repaying it as per schedule pushes your credit score up. And in future, if you want to avail any kind of loan that involves a more significant amount, the lender is likely to clear it based on your credit history.

When not to use a Personal Loan?

Though Personal Loans are accessible and affordable, there can be certain circumstances and situations during which the borrower should avoid this form of credit. Some of them are listed below:

• Borrowers with poor credit scores should avoid taking a Personal Loan because a weak credit history would translate into a much higher interest rate on the loan. This would push up EMIs or repayment tenure and make the loan quite expensive.
• A Personal Loan should also not be used if there are other types of loans designed for the specific expense you intend to incur, like home loan, auto loan etc. These other loans can be cheaper, may suit your requirements better and can come with a host of other benefits that Personal Loans do not provide.
• Before taking a Personal Loan, assess your repayment capacity. Use a Personal Loan EMI calculator and get an estimate of the monthly instalment you will have to pay on the desired loan amount. Get a Personal Loan only if you can pay those EMIs comfortably every month after meeting your regular expenses. If the EMI amount looks stretched, then opting for a Personal Loan is not advisable.
• Lastly, take a Personal Loan only if you need it and have no other option. If the expense is easily avoidable, it is better to defer it until you have more funds in hand.

Why choose a Personal Loan over other types of loan?

Personal Loans are usually preferred over other types of loans because of the following reasons:

• They require minimal documentation and paperwork and are pretty easy to process.
• The disbursal of funds is speedy, and the amount is credited into your account within a few hours to a couple of days. Some lenders also offer the facility of pre-approved loans to existing customers where the loan amount can be sanctioned within minutes.
• Personal Loans can prove to be less expensive than credit cards, thereby helping you save money on instalments.
• Since Personal Loans are collateral-free, borrowers do not need to pledge their assets to avail of the funds.

Final note

Now that you know when to take out a Personal Loan, you can consider applying for one. A Personal Loan is an attractive proposition because you can spend the loan proceeds to meet any kind of personal or business expenditure without having to provide any proof on the end-usage of funds to the bank. If used rightly and repaid on time, this loan can be a huge boon. You just need to ensure that you repay your EMIs on time, without defaulting. Repaying your Personal Loan on time makes you eligible for other loans in the future and improves your credit scores significantly.

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*Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice.