When to consider a personal loan—and when to avoid it
What's the story
Personal loans can serve as a handy financial tool for many of us. They are flexible and can be used for a range of purposes, from consolidating debt to funding home improvements or paying medical bills.
But they're not always the best option. Avoid taking one for discretionary spending, like vacations or luxury purchases.
Here are five clear examples to illustrate different aspects of personal loans.
Debt management
Consolidating credit card debt
One of the most common uses of personal loans is to consolidate credit card debt.
By availing a personal loan at a lower interest rate than your credit cards, you can pay off your high-interest balances and consolidate your payments into one monthly installment.
For example, if you have multiple credit cards with interest rates between 15-20%, getting a personal loan at 10% could save you money.
Home improvement
Funding home renovations
Personal loans also come in handy for home renovations or repairs.
Unlike home equity loans, which require you to put your property on the line, personal loans are unsecured and do not jeopardize your home.
If you're looking to remodel your kitchen worth ₹5,00,000 but don't have the funds at hand, a personal loan could offer the capital you need without diving into savings/investments.
Health costs
Covering medical expenses
Unexpected medical expenses can crop up suddenly and put a dent in finances. Personal loans provide an option to pay for these costs without emptying emergency funds or savings accounts.
For instance, if an unexpected surgery costs ₹2,00,000 and insurance only covers part of it, a personal loan could bridge the gap between what insurance pays and what remains due.
Big buys
Financing major purchases
If you need to buy essential items like appliances or furniture but can't afford to pay the full amount upfront, a personal loan can be a helpful option.
It allows you to make the purchase without turning to high-interest store financing or credit cards. This is especially useful when the purchase is urgent and necessary, but your current savings don't cover it.
A personal loan can spread out the cost in manageable monthly payments at lower rates.
Event planning
Managing wedding expenses
Weddings are expensive and often go beyond the budget, which is why couples prefer taking personal loans at low interest rates.
These loans, provided by banks across the globe, can be paid in easy monthly installments. This way, you can cover major expenses without the financial burden.
It can make sure that your big day is memorable and you celebrate it happily with your near ones.