Is it a good idea to raise a personal loan? MintGenie explains the pros and cons | Mint

Staring at an acute financial crisis could compel you to explore an array of funding avenues. Among these, one of the most feasible ones is to raise a personal loan.

A personal loan is an unsecured loan that can be used to meet urgent financial needs, such as a medical emergency, a wedding, a home renovation, a vacation, or a luxury item for a loved one.

For some applicants — raising a personal loan is a compulsion while for others, it is a matter of choice. While the jury is still out on whether it is a good idea to raise a persona loan or not, we give a lowdown on the number of criteria which can help you determine whether it is a good idea to raise a personal loan or not.

Before you decide to raise a personal loan, make note of the following points:

1. Purpose of loan: First and foremost, you should examine the purpose of the loan. If it is taken for one of the key purposes for which personal loans are usually taken, then it is acceptable. 

For instance, if the loan is applied to meet expenses for a wedding or for home renovation, then it is rational to take a personal loan, as there is no other option.

2. Interest rate: Typically, higher interest rates are charged on personal loans, which could be in the range of 11-17 per cent per annum.

So, before deciding to take a personal loan, make sure that you can service the high interest rate that accompanies a personal loan.

3. Tenure of loan: Another factor that can influence your decision whether to take a personal loan or not is the tenure for which you plan to raise a loan. If the tenure is long, the EMI (equated monthly instalment) becomes smaller, therefore the servicing of loan becomes manageable.

On the other hand, if the loan tenure is short, the EMI becomes large, thus making the servicing of personal loans more difficult.

4. Avoidable or not: Certain purposes for which a personal loan is taken are avoidable, while others are not. For instance, when there is a wedding at home, it is unavoidable and you must raise money to meet the expenses.

On the other hand, certain expenses are dispensable, if not avoidable, such as going on a vacation. So, you can decide whether you want to take a personal loan based on how urgent the purpose of the loan is.

While talking about the prospect of raising a personal loan to spend on travel, Preeti Zende, founder of Apna Dhan Financial Services, says, “Travelling is considered as your aspirational goal; so for such a goal, it’s always better you use your savings and regular income to fund it rather than going with an easy loan option. Such easy loan access makes you spend more than you budgeted and then you have to pay the EMI at a higher level for the next 3 to 5 years. This reduces your saving capacity and you end up compromising on your key financial goals.”

5. Other category of loan: One more yardstick that you can use to determine whether you want to raise a personal loan is the category of loan that you want to opt for.

If the category is niche and there is an option to raise a personal loan within that category, then you should go for that. For instance, if your bank may be offering a home renovation loan, then it is futile to raise a personal loan for this purpose alone.

On the other hand, if you want money to meet a purpose which does not come under any special category, the go-to option is a personal loan.

6. Expert advice: Additionally, if you still face a dilemma of whether you should take a personal loan or not, you can seek an expert’s advice. The expert could be a financial or investment advisor who could tell you the pros and cons of opting for your decision to raise a personal loan.