Taking a personal loan? This is what you need to keep in mind

With the rise in expenditure and meeting short or long term goals, personal loans are something which is now unavoidable.

Considering it is easily accessible capital with much simpler documentation process, personal loans are the first thing which you look at in any situation. 

If you have a decent credit rating and repayment capacity, availing such a loan from any financing institution takes not more than a few hours. However, just because they are easily available does not mean that you should opt for one whenever fancy strikes.

First thing which you need to remember is that "a loan is something you need to repay and not a gift." Do not have the urge to borrow in excess hoping that you would be able to cut corners and make the repayments.

Navin Chandani , Chief Business Development Officer, Bankbazaar.com, said, "Bear in mind that personal loans are a good option only if the amount you require is not very big and your monthly budget can easily accommodate the additional EMI. Opt for a personal loan only as the last option and even then if you can pay it off in as less a time frame as possible to help you save on the interest cost."

Where you should use personal loan amount?

Emergencies: Personal loans are best for emergency situations such as medical expenses where you need funds. Instead of taking cash advance from credit cards, you can opt for a personal loan to meet contingencies. The processing time is less and simpler; it is also much less expensive compared to credit cards.

Credit card dues: It also makes sense to take a personal loan to repay credit card dues if the dues are large and difficult to clear off through conventional means. Credit card defaults are charged with extreme high rates of interests to the tune of 30% to 45% annually. In such situations, the personal loan is relatively cheaper way to get rid of the dues.

Often, personal loans are used to buy household gadgets and repay the money in easier installments subsequently. So long as they are not used to buy non-essentials, the use of personal loans is justifiable. Personal loans are also used to fund weddings and honeymoons, though it should be avoided as far as possible.

Moreover, what you need to keep in mind is you can avoid taking personal loans in some situations. Like you can take specific loans for your needs. For instance, example, take car loan to buy a car or a home improvement loan to finance repairs to your home. Such specific loans would be cheaper than a personal loan and may come with additional tax benefits as in case of home improvement loans, Chandani said.

So, do take personal loans wisely and avoid borrowing in access which could turn into a "nightmare".

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