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When Are Personal Loans a Good Idea? For individuals who need instant cash, it has emerged as a source of quick financing

By Prithvi Chandrasekhar

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In the recent past, personal loans have become a common phenomenon. And why wouldn't it be? For individuals who need instant cash, it has emerged as a source of quick financing. But what is a personal loan?

It is a collateral-free loan that can be used for any purpose. For instance, if you are planning to go on a vacation or thinking of renovating your house, you can use a personal loan virtually for any purpose (other than stock investments). In other words, it is a form of credit that can be used for debt consolidation, large purchases, and emergency expenses alongside others.

Now, we have a fair idea that personal loans can be savior in many situations. But we also have to keep in mind that they are a financial liability that needs to be fulfilled. So, before we plunge into the world of personal loans, let's first find out the use cases in which they are worth every penny of the interest applicable.

Consolidated debt

If you have an outstanding credit card loan with a high-interest rate or have multiple monthly repayments to be made, availing of a personal loan will be a prudent choice. You can also apply for a personal loan to borrow money for repaying your pending debts. Taking a personal loan with decent interest rates will prevent scenarios such as payment default which might impact your credit score. It can also ensure that you don't shell more money on interest than you should. You can lower the amount of interest paid on each debt as well as reduce your repayment burden to a great extent.

Financial needs

In the case of financial emergencies such as an unforeseen expense or medical emergencies, the instant availability of financial support becomes a much-needed help. Thus, personal loans come to the rescue in such situations.

Refinance education loans

Education loans usually have a higher interest rate as compared to personal loans. Therefore, you can consider availing a personal loan at a lower interest to refinance your education loan. However, before you refinance the education loan, take into consideration several of its aspects such as tax benefits, interest rates, etc.

To finance a vacation

We all need a break from our day-to-day activities. So, if you are planning to go for a vacation with your friends or family, why drain your savings? Opting for a personal loan is a way better decision. And if you have a good credit score, it will ease the process of getting the loan, which you can repay subsequently with monthly EMIs.

To get married

Weddings are an expensive affair. Right from booking the venue and food to buying clothes and jewellery, all arrangements require a large amount of money. This can take a toll on your savings. This is where a personal loan can help you by financing your wedding. Make sure that you settle for a personal loan with a competitive interest rate.

Improving credit score

To get loans, it is essential to have a good credit score. The simple trick is to take a small personal loan and pay it off on or before time. This way, you create a good credit history which plays an important role in your future application. The lender often considers your credit history before lending out a huge sum of money. Availing a personal loan can help you add to your credit mix. Also, having different types of loans can help you boost your credit score. It may also help you reduce your credit utilization ratio.

It is no doubt that personal loans can be a helpful tool in many situations involving financial emergencies. However, it is advisable that you make sure whether your income will enable you to pay off your loan balance. This consideration will eliminate the added stress of any hiccup in the future.

Prithvi Chandrasekhar

President-Risk and Analytics. InCred

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