4 Situations When Taking a Personal Loan Makes Sense

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Each one of us has been in many situations when we felt the shortage of money in hand. The reason may be any – having dire need of funds is realistic in today’s world. It could be a medical emergency, making ends meet or even a desire to travel far-fetched lands; money makes it all the more possible. After all, the heart wants what the heart wants.

So, what can be done when there is an immediate need for money? You certainly cannot grow a money tree or print your own currency.

A personal loan is the answer.

What is a Personal Loan?

A personal loan is a collateral-free loan that the borrower pays back in fixed monthly payments over the time of ‘x’ months at a particular rate of interest. It can be virtually used for anything – buying jewellery, funding a vacation, or even education. They are easily approved, have quick disbursals, and there is no documentation required.

However, it is always a good idea to be wise when taking a personal loan. There are some situations when a personal loan will ease things up, and we are here to discuss those. Let’s take a look.

Here are 4 situations when taking a personal loan makes sense

1. Repaying Existing Loan with Higher Interest Rate

Having an outstanding loan with a high interest rate can be daunting by the month end. Taking a personal loan to repay existing loan is a good idea and recommended by most financial gurus.

Here’s an example to make it simple for you:

Consider you have a credit card loan with an interest rate of 30%. Now that is a lot of interest you are paying. Taking a personal loan at 15% or even 20% to pay outstanding credit card dues will be a wise thing to do as it will reduce the interest substantially.

Let’s do the math for the above example:

Suppose, you have an outstanding loan of Rs 1 lakh on credit card, you will be paying Rs 30,000 as interest over the tenure of 1 year with an interest rate of 30%. However, to pay back this credit card due, you take a personal loan of 1 lakh at an interest rate of 15%, you will only end up paying Rs 15,000 as interest over the tenure of 1 year. It will save you Rs 15,000 on interest.

2. In Times of Emergency

Emergencies can pop up anytime and anywhere without a moment’s notice. The need for money is instant in emergencies, especially medical emergencies. In such situations, a personal loan is the only thing saving the day.

Most financial institutions offer personal loans with no collateral. Financial institutions like ABFL Direct offer personal loans that are approved within 30 minutes and require zero documentation. It is something that is highly valuable when it comes to needing emergency funds.

3. To Invest For a Better ROI in a Business

In today’s economy, there are plenty of investment opportunities in businesses that keep coming by the day. If you sense a lucrative investment opportunity that promises a high rate of return, a personal loan can come at your disposal. However, make sure the rate of return is higher than the interest you will pay on personal loan – after all you need to make a profit.

Here’s a tip:

Make sure you have a good credit score as it will allow you to take a personal loan on a much lower rate of interest. It will help maximise the return on the investment you make with a personal loan.

4. Renovating or Constructing Your Home

Why would anyone take a personal loan when renovating or constructing a home? Well, for starters, the paperwork is way less when you compare it with a home loan. Secondly, there are absolutely no limitations to how you use a personal loan – no questions asked. You want to repair a ceiling, install drywall, convert your kitchen into a modular one – do anything with a personal loan.

The cherry on the cake is that you can still enjoy the same benefits of a home loan – including tax deduction. Prove that you have utilised the personal loan in construction purposes and you can avail a tax deduction of up to 2 lakhs on the interest paid during that financial year. The tax deduction is under Section 24B of Income Tax Act.

Conclusion

Personal loans go way beyond than just solving immediate cash crunches. Availing a personal loan is easy and require no documentation for sanctions. Furthermore, you can choose flexible tenures to repay the loan. Did we mention there is also no collateral? Make an informed decision and compare before you sign up the papers!