When should you consider taking a personal loan?

Navigating financial challenges can be daunting, especially when unexpected expenses arise. Personal loans can be a lifeline in such situations, offering quick and easy access to funds at an interest rate depending on your creditworthiness. In this blog, we will explore various scenarios where a personal loan can be a smart financial choice so that you can make informed decisions that align with your needs and circumstances. 

Before we dive into when you should take a personal loan, let’s first explore why you might choose a personal loan to address your needs:

• Quick source of funds: Typically, cash is credited in a few hours or even minutes when you take a personal loan
• Competitive interest rates: With a good credit score and stable income, you can secure lower interest rates, easing the repayment burden
• A structured repayment plan: Fixed repayment schedules and manageable EMIs  that don’t strain your finances
• No collateral: No risk of losing assets if you default on repayment

When should you take a personal loan?

Repayment of existing loans

By clearing multiple loans with a single loan, you can potentially save a significant amount on interest. This strategy is particularly beneficial for individuals with credit card debt, as personal loan interest rates are typically lower compared to the high rates charged on credit cards.

Suppose you have two credit cards, each with an unpaid balance of ₹50,000. The average interest rate on these credit cards is 30% per annum. This means you are paying ₹15,000 in interest for the year, totalling ₹30,000 annually for both cards (₹50,000 x 30% x 2 cards). Managing such high-interest payments can be challenging, especially if you have other financial obligations. Additionally, paying off a portion of the balance will still result in interest charges on the remaining amount and any new purchases you make.

But if you take a personal loan of ₹1 lakh at a lower interest rate of 15% p.a. to pay off your credit card balances in full, you immediately reduce your annual interest payments from ₹30,000 to ₹15,000.

Additionally, unlike credit cards, which can have unpredictable interest rate changes, personal loans come with fixed interest rates. You can also choose a longer tenure for your loan, which will spread out the repayments over an extended period, making your EMIs more manageable.

Large purchases

A personal loan is a practical choice for financing big expenses like weddings, moving to a new city, or paying tuition fees. It prevents you from draining your savings or maxing out your credit card, which can make monthly bill payments challenging.

With a personal loan, you can combine these large expenses into one monthly payment, making it easier to manage your finances.

House renovation or repairs

Home improvement projects can quickly become expensive if not managed properly. Additionally, taking a home renovation loan usually requires you to keep your property or any other collateral as a security with the lender. In such cases, a personal loan is an ideal alternative since it requires no collateral, has quicker disbursal times, and involves less paperwork. This allows you to enhance your living space or address maintenance issues quickly without the lengthy and complicated process of securing a home renovation loan.

Emergency expenses

Unexpected medical expenses can catch anyone off guard, whether it’s a concerning diagnosis or urgently needed expensive medication. In such emergencies, funds from a personal loan can be deposited into your bank account within a few hours.

You can also choose to divide the emergency costs between a personal loan and your savings. This approach ensures that you retain some cash on hand while managing a smaller loan balance that needs to be repaid.