10 things to consider before taking a personal loan to overcome cash crunch

By: | Published: September 29, 2016 12:05 PM

Personal loans come handy when your need cash in an emergency or even to lower your overall debt burden by paying off some of your higher cost debts.

10 things to consider before taking a personal loan to overcome cash crunchPersonal loans come handy when your need cash in an emergency or even to lower your overall debt burden by paying off some of your higher cost debts. (Photo: PTI)

Do you have a medical emergency in the family for which you need money urgently? Do you want to pay off your high-cost loan to get out of the debt spiral? Are you falling short of funds to pay for your child’s education? Help for you in such situations can come from your bank through a personal loan. It’s a quick and easy way to access funds.

Personal loans come handy when your need cash in an emergency or even to lower your overall debt burden by paying off some of your higher cost debts. But when it comes to availing personal loans, you need to be cautious. This is because lenders extend personal loans at high interest rates to offset their lending risks associated. Here we tell you what all you should weigh before you decide to sign the loan agreement.

But firstly, what are personal loans?
Unlike a home loan or a car loan, personal loans are clean loans for which the bank does not insist on collateral. Being an unsecured loan, the risk for the bank is considered higher since they have only the legal process to resort to in case of a default. Hence, the loans are priced higher than those that are backed by collaterals.

Here are 10 things you should keep in mind while going for that personal loan

Consider overall finances before taking a personal loan: Personal loans may seem to be a quick-fix for all your urgent money needs. But they come with high interest rates and short repayment tenures short. Hence, monthly repayment amount could be large. You should consider your other loans and monthly payments and be sure that you will be able to meet your repayment obligations.

Do not go overboard with the loan amount: Since personal loans are easy to access and are often disbursed within a day or a few days, there could be a tendency to go for a larger amount of loan than you need. Limit the loan amount to what your end-use purpose is.

Consider whether you can access alternative cheaper loans: Within their loan offerings, banks have products that could work out cheaper for you. These could be loans against assets such as gold, shares or even deposits. Since these are asset-backed and secured the interest rates could be much lower than personal loans.

Ask your bank whether they can grant overdraft facilities: Overdraft can be resorted to if you have an account with the bank and especially if the loan amount being sought is not very large. Banks generally offer their credit-worthy account holders an overdraft facility which may again be lighter on your finance than a personal loan.

Take recourse to personal loans only for pressing financial needs: While there will be temptation to seek bank loan for things like leisure travel and to buy the expensive gizmo that you so like, accessing personal loans to fulfill such desires can mess up your finances since you will add another repayment component that would go out of your monthly salary.

Negotiate for best rate: Banks are always competing among themselves for lending to credit-worthy borrowers. So negotiate hard to get a better rate on your loan deal. Even a fraction of a percentage could mean a substantial reduction of repayment burden.

Read loan agreement details carefully: You should always read the loan document in its entirety, including the fine print to know all the charges, fees and penalties for non repayment. This will help you not to be caught off-guard later. Do not rely blindly on the bank relationship manager who might not make you aware of some important details.

Know the process of deferment: This would come handy in case you have a temporary cash crunch leading to inability in meeting repayment obligations. While the going may be good when you decided to access the loan, there is always the possibility of things going wrong in future. A loss of job or another emergency can create short-term cash crunch and inability to meet payment obligations. You should be aware of how to handle such a situation at the time of accessing the loan.

Think of the consequences of not being able to repay loan in time: Loan default can have serious consequence. Being aware of the consequences can itself make you a disciplined borrower and help you work within your means.

Remember defaults can mess up your long-term credit score too: Besides brush with the authorities and courts, defaults will also have a negative impact on your credit score. Even if you are later able to service the present loan successfully, your ability to access loans at a future date may be severely curtailed as your credit history would reflect the previous defaults. A clean credit history can also help in negotiating cheaper interest rates later.

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