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When NOT to take a personal loan

April 22, 2009 18:40 IST

Whenever people have a requirement for some urgent cash and cannot come up with the amount needed with the resources they have, they inadvertently apply for a loan from a bank.

Getting a loan today has become very easy, what with the stiff competition prevalent among different banks. The easiest to get among the plethora of loans available are personal loans.

Personal loans are easy to get, but they have their pros and cons:

Pros

Cons

When is it okay to take a personal loan?

It is important to understand that personal loans are a good option only if the amount you require is not very big and your monthly budget can easily fit in the added EMI expense. Exercise the option of taking a personal loan, only because you have no other option and it is possible to pay it off in as less a time frame as possible to help you save on the interest cost.

When is it not okay to take a personal loan?

Alternatives to a personal loan

Loan against property (LAP) is a good option that can provide you loan at lower interest rates to the tune of 3-4 per cent lesser. The loan is available at a certain percentage of the property's market value, usually around 40-60 per cent. LAP interest rates are cheaper by 3-4 per cent compared to personal loan rates.

You could also utilise any investments you might have made so far, like shares, securities, fixed deposits, gold, insurance policies, etc. You can pledge these as collateral and obtain a loan against them.

For instance, you can obtain a loan against the surrender value of your life insurance policy from the insurance company or from a bank or obtain a loan from your provident fund account if you have had an employee provident fund account for more than five years.

The interest rates would definitely be lower compared to the personal loan interest rates.

So before you decide to go in for a personal loan, check alternatives with lower interest rates. A personal loan may be easy to get, but does not necessarily become the best solution.

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