Getting a personal loan can be a smart financial move when used wisely. With interest rates lower than credit cards and quick access to funds, personal loans offer solutions when you need them most. Understanding why people take personal loans, how they work, and why you may need one empowers your financial decisions. Read on as we explore six rational reasons why people take out a loan.
Personal Loan Collaterals and Rates
Personal loans provide lump-sum cash that's repaid in instalments over a set period of time. They are typically unsecured, meaning nothing like your home or car is collateral if you default. Banks and NBFCs assess your income, credit score, and history to qualify and set terms.
Rates can go up to 40% but usually fall under 15% for borrowers with very good credit. Unlike mortgages or auto loans, you can use funds for almost any legitimate purpose. Payments are predictable as interest rates are fixed.
6 Reasons to Take Out a Personal Loan
There are various reasons why you can take out a personal loan. Some of the reasons to consider getting a personal loan are explained below:
1. Consolidate Higher-Interest Debt
Credit card debt can snowball, with interest driving balances ever higher. Banks and NBFCs offer personal loans with much lower rates, letting you pay off credit card debts and reduce what you owe overall each month through a single consolidated loan payment. This saves money in the long term and simplifies repayment.
2. Finance Major Purchases
Some plans require significant one-time cash, whether moving across the country, remodelling your home, or preparing for a dream wedding. Personal loans allow you to finance these costs over months or years rather than emptying savings or relying solely on credit cards at 20% or higher rates.
3. Handle Surprise Emergencies
We may need help to afford sudden car repairs, emergency travel, or urgent medical bills. Personal loans offer fast access to funds from ₹50,000 up to ₹15 lakh or more, making it an ideal option when you want funds during emergencies.
4. Establish/Rebuild Credit History
Personal loans let those new to credit responsibly access and use loans to build their score. For others with damaged credit, making timely payments can be of help. In both cases, better rates on future borrowing become accessible over time.
5. Fund Education Costs
While student loans directly finance higher education, personal loans fill gaps like licensing exams, tech costs, or off-campus study programs. Affordable personal loans help pursue career goals.
6. Finance Life Events
Few have enough cash saved for every big event, like adoption processes, fertility treatments, religious ceremonies, destination weddings, etc. Personal loan makes aspirations possible without using up retirement savings or home equity.
Things To Consider Before Getting a Personal Loan
While personal loans serve a valuable purpose, they also come with downsides to evaluate:
- Interest Charges: Banks and NBFCs charge interest fees on personal loans, increasing the total repayment costs. It's important to consider if it's worthwhile.
- Lengthy Payment Terms: Most personal loans take 1-7 years to repay. Ensure you can manage payments for that timeframe.
- Potential Debt Spiral: While debt consolidation loans simplify finances, relying too heavily on borrowing can lead to overspending.
- Credit Score Impacts: Too many loan applications in a short time frame can temporarily impact your credit score.
Before getting a personal loan, consider your budget, ability to repay, and spending habits. If you struggle with debt or overspending, consider budgeting, increasing income, or selling assets instead.
Conclusion
Understanding why taking a personal loan can help manage essential expenses like unexpected bills or home improvements is crucial. A personal loan can keep you moving forward without compromising your financial stability or long-term goals. Remember, it’s crucial to borrow responsibly and ensure the loan aligns with your financial situation.
By evaluating your needs and potential benefits, you can determine why we take loans and how they can support our financial journey when used wisely.
