People who are health conscious are always on the look out for healthy eating, however they too have cheat days when they gorge on their favorite dishes. Festivals are such period when a lot of disciplined financial planners go beyond their spending limits or budget, just to satisfy their instincts. But breaking the spending limit can come at a cost especially when you are in a fixed income earning group. Many times, we end up opting for personal loans to meet our needs or during financial crisis, when you don’t have enough savings. However, is personal loan really a good choice? Let’s find out if the pros outweigh the cons:
Additional EMI burden: It is easy to follow your heart and spend on things you love, but only until the credit card bill pops up or the personal loan EMI alert hits your mobile phone. Every person has spending limits on account of various liabilities and obligations, hence the income is pretty much tied up. When follow your heart, it raises that liabilities column and thus reduces your foregoing monthly spending.
High cost in every sense: Personal loan is unsecured loan, meaning it does not require any security or collateral to avail it. As a result, it is costly compared to other loans. Moreover, personal loan also carries substantial cost in the form of processing fees, pre-payment charges and heavy penalties in case of default. In short, not a promising deal unless you are in dire need of funds.
Impacts your credit score: This may be a positive thing for first timers to build their credit history. However, default in repayment of the loan, reduces your borrowing powers in the future. Therefore, a simple mistake of non-payment can not only cause you heavy penalty but also impact your credit score in a negative manner.
Practically never a profitable deal: One cannot legally buy a house or invest in mutual funds or stocks by availing personal loan. Since the lender always asks for the reason of availing the loan and also takes an undertaking of not investing the money in stock market. Going by above understanding, personal loan is usually used for emergencies or buying consumer durables or renovation or such other allied activities — neither of the same can result into a return or profit in future.
Managing personal finances: People with multiple loans can take personal loan to manage their finances in a better manner. Since multiple loans have multiple interest rates, one with a good credit score can fetch a cheaper personal loan and pay just one loan with fixed rate of interest. This is nothing but debt consolidation which may result into saving of interest cost.
Spreading huge cost into simple EMIs: Events such as marriages or medical emergencies require substantial amount of money. Sometimes these events outlast your emergency funds. In such cases, one can avail personal loan and overcome the financial requirement by paying monthly EMIs. Even in case where you do not want to liquidate your investment and are in possession of sufficient income without liabilities, a personal loan can be helpful if anticipated returns on such investment is more than the interest cost of personal loan.
Quick money without security: If in early morning you search personal loan on ‘Google’ there are chances you might receive the funds in your bank account before the day end. What the lender requires is good credit score of the borrower and KYC. You can avail personal loan in just a matter of hours rather than days. In addition, this loan is not tied to any of your assets. Thus, no consent of the lender is required to sell any of your assets.
To conclude, personal loans do more harm than good. However, they are not an entirely bad option to explore. Human needs differ from person to person and are always changing. Thus, if you could plan your expenses early on you may save yourself from setbacks. But in case of emergencies or to manage your finances in an optimum manner, you may avail personal loans provided you pay them on time and plan your future expense in a more effective manner.
(Viral Bhatt is the Founder of Money Mantra — a personal finance solutions firm)