Are personal loans useful?

Are Personal Loans Useful?

Everybody needs financial support in life. There are many ways of getting this support. A personal loan is one among them. A personal loan is meant to fulfil personal needs. A personal loan can fulfil most household needs of an individual. It can be used to meet emergencies or commitments.

Though all needs of an individual are personal, not all can be met through a personal loan. For instance, buying a house or an automobile is very much a personal need or wish, but, a personal loan is not meant for them. There are special loans available for them like a home loan or a vehicle loan which are made for such purposes.

Being unsecured, a personal loan is offered to people who meet the bank's requirements. A person who maintains his account well through regular transactions and promptly pays his dues on time becomes eligible for a PL. A good CIBIL score makes personal loan easier to get.

Uses of a Personal Loan.

A personal loan may be useful for some purposes. Some of them are:

(1) Reviving a lapsed life insurance policy: A personal loan can be used to pay outstanding premiums of a lapsed life insurance policy. A lapsed policy is always a financial burden and a loss if not revived. Reviving a lapsed policy through a personal loan may be justified if it can be done without creating other unmanageable liabilities. If the interest of a personal loan is reasonable and if its EMI is affordable and if it can serve the purpose of reviving a policy without impeding future renewals in any manner, then going for a PL might be a good idea.

(2) Clearing credit card dues: Clearing outstanding credit card dues through personal loan is also a good idea if it can be done comfortably. Credit cards charge interests of more than 35% annually which usually becomes unmanageable if the outstanding amount is huge. A PL can be taken to clear away the total credit amount. However, this should be done carefully and through planning because personal loans too have a high rate of interest. A personal loan is the most expensive loan. Its interest rate is somewhere between 9% to 26%.

(3) For emergencies: A personal loan can be taken for emergencies. Here again, a point to be noted is that the PL should be able to meet the requirements without strain. There are many kinds of emergencies, but the most demanding is the medical emergency. It is the most unpredictable emergency and also the most troubling one.

(4) For clearing debts: Debts can be cleared through a personal loan. Some debts are problematic. A problematic debt could be one in which the lender is harsh on the borrower and demands quick settlement of the borrowed money. In such a situation, clearing the debt becomes the only way out. Debts which are troublesome can be cleared away by loan.

(5) For clearing other dues: Dues which are outstanding can be cleared through a PL. Unpaid rent is a major hurdle which has to be cleared anyway. A PL could be of help in such a situation.

A PL can also be taken for purposes which are not important. This may include taking a loan for leisure or sports, a foreign trip, for renovation of house, for festivals, for cosmetic treatment etc. However, spending money from PL for such purposes is not advisable as it may have adverse effects on future savings and monetary well-being.

Limitations of a Personal Loan.

A personal loan has some limitations. Here are some of them.

(1) A PL may not be available when needed. This is a major drawback. Most personal loans come as offers from banks and these offers are based on the previous or existing track records of credit repayment. If you approach the bank for a loan without any offers from them, then, to get a PL may be a bit difficult.

(2) The loan amount is often limited. You may not get the amount you need. A loan which is inadequate is disturbing because you have to depend upon another source to meet your requirement. Borrowing from too many sources increases the burden many times.

(3) A personal loan is not for everybody who wants to borrow; it is only for them who can repay the loan. The lender considers many aspects of the borrower before lending him money and one of the consideration is the age of the individual. Personal loan is given to them who are young and working. Usually, the age limit for borrowing is up to 55 years. It may vary among lenders, but this is the maximum limit for most loan providers. If the borrower is above 55 years of age, getting a personal loan will be difficult.

(4) Personal loan has a high rate of interest, which makes it inappropriate for all purposes. High interest rate is a limitation in itself because it discourages a prospective borrower. High interest rate of a personal loan can affect savings badly. With less savings, the future liquidity needs would again require the support of a loan.

Financial support of any kind is useful only if it serves the intended purpose and is within the capacity of the receiving individual. A loan is an expensive product. If the purpose of taking a loan is not well defined, then it may prove useless. Personal finance is always a cause for worry for many people and the reason for this could be many. If we try to analyze the reasons for poor financial health among people, we invariably notice some common issues which make them poor like low income, high expenditure, less savings or high debt. In most instances, these issues keep on repeating. A loan is just a temporary relief. It could solve a liquidity problem quickly, but it could also create a new one. A loan funds the account instantly, but this fund drains out quickly. This being the characteristics of a loan, what would be the answer for the question: are personal loans useful?

The answer for this question could be given in one sentence and it is this: yes, personal loans are useful only when it is used properly.

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The previous post was: Recurring Deposits.

The next post is: Poverty.

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