Advantages of personal loans

There comes a time in life when one feels the urgent need for money. So what does one do at a time like this. Turn to friends? No way. Ask big brother or sister. But do they have the money to spare? Then what?

So I want to borrow money and I don't want to be grilled for the reason behind this urgent need. So what do I do? Even the company that I work for does not give a personal loan without asking questions, unless I am taking a salary advance.

Don't worry. It is not as bad as it sounds. There are plenty of banks and finance companies that are willing to give money if one can assure them of the ability to repay. In fact, it is no different from the credit limit you enjoy on your credit card.

But you should think twice before grabbing that credit card and taking that much needed money. You might not be required to fill out forms or answer embarrassing questions, but instead you will pay interest over and over again.

This is how it works. By allowing you to pay back the minimum amount due, usually 5 per cent of the balance, the bank actually charges you interest on your interest, which could add up to more than 40 per cent a year. That is more than double the rate you'd pay for the most expensive loans available in the market.

We are now living in the age of consumerism. Lenders are vying for your business and are now willing to give you loans for almost anything including foreign travel, remodelling your home, etc. It is wiser to take a loan that matches your needs.

After all, your cash credit limits are, in a way, a personal any-time, anywhere loan that you can avail subject to prevailing limits. However, the catch with borrowing too much on your credit cards is that the charges are too high and the limits are generally on the lower side.

These days you have tailor-made schemes for everything: housing loans for purchase of property, auto loans for financing anything from a scooter to a truck, and so on and so forth. But the problem arises when you want a loan for an intangible asset or expense like a wedding or a holiday. So this is when you can go for a personal loan.

The popularity of these loans stems from the fact that you don't have to state the reason why you need the money. You have total confidentiality. Nobody asks you questions about why you need the money. You don't have to produce any collateral or guarantor either.

And, last but not the least, the repayment options are quire comfortable. And the paper work is quite simple.

But before you rush to grab that loan a word of advice. There can be hundreds of reasons why one would like to go in for a personal loan. But there are two that are really worth it.

The first is when you are using the money raised in a personal loan to refinance a higher cost debt. Assume that you have a revolving credit on your credit card at the rate of 2 per cent per month. This amounts to 24 per cent per annum.

What's more, every single item that you purchase and every expenditure billed onto your card is subject to this rate of interest.

So now you don't get any free credit. You can opt for the personal loan and clear all your credit card outstanding. You will be paying less to service your loan and you can once again avail of interest-free credit.

The next option is, if you are heavily into debt and that too from a variety of sources. You could be servicing a consumer durable loan, revolving credit on your card and probably even take an overdraft on your bank deposit. Instead of servicing the debt at different rates of interest with different repayment tenures, it makes sense to consolidate it into a single source. You will find that you are in a position to manage your finances much better.

But, whether or not you end up paying more by way of interest depends on where you have taken the loan from. To determine this, calculate how much of money you will need to repay all your loans. Present this figure to the banks and ask them how much the equated monthly installments will be on such a loan.

The repayment tenure should be around the maximum time you think you will need to pay off your current loans. If the equated monthly installment is way above what you are paying now, the personal loan will be an expensive proposition, despite the convenience.

R. Dyes is a journalist based in New Delhi.