Why Is It A Right Time To Apply For A Personal Loan?

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Personal loan is considered as one of the easiest that an individual can take. There are generally no questions asked, no need of proofs, no criteria to be met. This is unlike other loans, such as those for education, where you require giving evidence of admission, or a home loan, where your house will be used as a security. While every bank is providing personal loans, financial experts advise borrowers against taking these. Why?

The main reason is that these loans are considered as one of the most expensive loans as the rate of interest can cross 30 per cent mark. The extremely high rate of interest is justified because the borrower doesn't require giving a collateral security. The lender will calculate the amount of loan by taking into account the current financial status of the borrower and other parameters, including, cash flow, salary, rental income, profit & loss in business, servicing of other loans, etc. But if the loan is so maligned, why does it exist? Is it beneficial to apply for a personal loan? Yes, it is, depending on the circumstances of the borrower. Let’s check out three situations which justify taking a personal loan, provided there is no other option left, like borrowing from family.

For settlement of a debt which has a high rate of interest

If you are intending to repay a loan that has a very high rate of interest, while that of the personal loan is lower than it will be right to choose the latter. It is feasible to use the personal loan for closing out the higher interest debt. For instance, at times, when people need cash urgently, they borrow a small proportion of amount from money lenders, where they pay only the monthly interest and promise to pay the principal amount at a later stage. This interest amount is usually on the higher side varying anywhere between 1.5 per cent- 3 per cent a month. If you will be able to repay the principal amount in less than six months then you will be able to keep paying the interest on a monthly basis. In case you will take longer to repay the principal amount; it is advantageous to go for a personal loan and use it to settle the earlier loan. Also, when you will regularly repaying your loan amount then it will create a good repayment record, which will in turn help in improving your credit history. You can leverage this in future to get high loans at lower rates.

For paying off a large credit card balance

You can use the personal loan for paying off a substantial credit card balance that is being rolled over for last few months. By paying only the minimum amount on the card bill will not prove useful as the interest rate is charged over the total bill amount, which is very high, generally, 2.5 per cent-3 per cent a month. It is a good idea to divert your money in paying the EMI of a personal loan.

Suppose, you have made a payment of Rs 2.3 lakh through your credit card. You may find it difficult to pay this large amount in one go and could decide to make the payment of minimum balance every month. However, even after the period of six months, there is a balance of Rs 2 lakh. It is pertinent to clear this amount and for that you can use one option out of the two, which are continue to pay the minimum amount every month, or apply for a personal loan.

If you will exercise the first option and pay only the minimum amount, which is 5 per cent then it, will take you 350 months for clearing your bill and the total payout in this case will be nearly Rs 4.78 lakh. The right choice is to apply for a personal loan of Rs 2 lakh to settle the card amount. If the rate of interest for the loan is 18 per cent a year then EMI for two years will be Rs 9,985 and the total payout would be come out Rs 2.40 lakh, which is very less as compared to the first option. Another advantage is that after paying the card balance, you can continue using the card for purchases and can enjoy its different facilities.

For education

You can apply for a personal loan for higher education. Though, it will not be helpful at the graduate level as the chances of getting a fatty salary to compensate for the interest outflow is less, therefore, it is more useful for a professional course. It is good to opt for the personal loan in such situations where there is an urgent need of funds and you cannot submit proof of admission on time or if you do not want to pledge any collateral security. However, it is advisable to take this route only when you are unable to get an education loan or if you want to top up your funding.