Personal Loan vs Emergency Savings: Which is a better option?

Most of us have some savings accumulated for a range of purposes, be it investment, buying a new vehicle or property. Sometimes unexpected incidents can lead to a financial emergency, and one may require a large amount of money almost immediately. This leaves individuals with two options- either they can deplete their savings or take a personal loan. Both options have their own advantages and drawbacks.

Before exhausting your emergency funds or seeking a personal loan it’s important to understand a few financial intricacies involving both options.

Emergency savings and its benefits

Emergency savings is a corpus fund, either saved in one’s bank account or invested in other investment instruments, that are used by a person in case of any financial crisis. Many people have emergency savings kept aside, mostly in the form of debt instruments like liquid funds, money market funds and fixed deposits. This option gives investors a dependable option in case of any crisis.

Emergency funds should ideally have an amount to meet around three to six months of essential expenses like rent, utility bills, groceries and more.

Using an emergency fund will lead to no debt obligation. If some money is withdrawn for any reason, you can start rebuilding the corpus as soon as possible.

Personal loan: Benefits in times of crisis

If you do not want to exhaust your emergency fund, or if the requirement is more than the money you have, you can opt  for a personal loan. Banks offer personal loans for a variety of purposes, including any financial crisis. Individuals have to submit their financial documents to a lender in order to prove their eligibility for the loan. If their documents and credit history prove that they will be able to pay back the money, the loan will be issued.

This option helps individuals retain their emergency savings and gives them an alternate avenue to get cash while keeping their funds as a repayment option.

Personal Loan vs Emergency Savings: Which is a better option?

If there is an emergency, the better option would be to use your savings. This might upset your investment plans, but the best part is you won’t have any debt repayment obligation. It will also aid you in keeping your credit score intact.

Personal loans require monthly EMI payments, which could be an additional burden. If you are unable to handle the payments, you will fall into a debt trap. This will impact your savings in the long run as well. Any default on loan repayment will also impact your credit score negatively.

The key with both options is to restructure your expenditures in the wake of a financial crisis. This will allow you to save money and keep it aside either for rebuilding the fund or for managing loan repayments.