Loans for all your needs – vacation, marriage or education. Or so the punchline claims. Besides, a personal loan is an unsecured loan, that is, you do not have to provide any security or collateral to the bank. This feature is frequently touted as a benefit over other types of loans. But before you pick up your phone and call the toll free number that your bank has been regularly sending to your message inbox, wait! Take a deep breath, and figure out a few things.
* Do I really need the loan?
Seems to be a stupid question, but really is the most important one. Reserve the PL for the most pressing of personal emergencies. Remember, the vacation to Seychelles will last for a week, but the Rs. 1 lakh loan that you have taken will mean an outgo of Rs 4000 per month for the next 3 years.
* How much do I need?
Again, a simple question, but an important one. The agent may tell you that based on your salary; you are eligible for a loan of Rs 2 lakhs. What he does not tell you is that it will also mean a higher EMI. Be very clear about the amount that you need, and don’t take a higher amount just because the rates are good, or you are eligible for a higher amount.
* Is it the only option?
What I mean to say is, consider the purpose for which you are taking the loan. It may be that another kind of loan may be better suited to your purpose. Your younger brother has just secured that coveted seat at the IIM, and now you need money immediately to deposit the fees. An Education Loan will better serve your need. That way, the EMIs can be paid when your brother starts earning. The EMIs will start after the completion of the course, whereas in a PL they will start immediately.
* Can I afford the EMIs?
You may be able to get a big amount, but will you be able to pay the EMIs? Keep in mind your fixed obligations like rent, telephone bills, school fees, petrol for your car, your Life Insurance premiums. These are not considered in calculating the loan eligibility, yet, you have to pay them out of the same source of income. Remember, you don’t want the recovery agent to come knocking on your door.
* Is it the cheapest deal?
Consider the offered rate of interest carefully, don’t be afraid to negotiate. Ask around other banks to ensure that you are able to get the cheapest and best deal. Negotiate over the rate, negotiate over the processing fees. A 2% difference in the interest rate may well mean a difference of more than Rs 100 in the EMI for a Rs 1 lakh loan.
In conclusion, you can safely say that a Personal Loan is an effective tool when used sparingly. True, it can be used to fulfill that dream vacation, but be careful lest the dream turn into a nightmare.