When should you take out a personal loan? 7 key scenarios | Mint

Personal loans provide ready access to money, but with responsibilities and downsides. Knowing when to seek a personal loan is the secret to sound financial decisions. Here are closer looks at when it makes sense to take out a personal loan.

Understanding personal loans

A personal loan allows you to borrow a specific amount of money and pay it back in fixed monthly instalments over a specific period. Personal loans are not secured loans. That is, they do not require collateral. This is in contrast to secured loans, such as mortgages or car loans. Personal loans are flexible, which makes them appealing for many needs, such as unexpected expenses, debt consolidation, or funding personal goals.

When should you consider taking a personal loan?

1. Medical emergency: Medical emergencies can be expensive, and you might have to bear significant expenses. Even if you are covered by health insurance, your insurance may not pay for all of your out-of-pocket expenses. You can obtain the funds to manage these expenses quickly through a personal loan, which helps without depleting your finances.

2. Wedding expenses: Weddings may also prove very expensive, especially in societies in which they play a very central role. A personal loan may come in handy when more money is needed to meet unexpected costs such as venues, catering, or decoration. Borrowing must make sense with your financial goals.

3. Moving to a new home: Relocation is costly, which ranges from hiring movers, transporting you, and sometimes staying temporarily when relocating for work or vacation. If you do not have savings, a personal loan may be able to cover the gap in your pocket.

4. Travel: Unplanned family emergencies or opportunities may be expensive, but planned vacations are usually within budget. Such immediate needs can be fulfilled soon with the assistance of a personal loan.

5. Home renovation: Improvements and home fixes often prove to be more money than what you bargained for. A personal loan is a way out if your home urgently needs repair and renovation but you don’t have enough money in the bank.

6. Higher education: In case you do not have sufficient money to pay for training or tuition in full, you may use personal loans to raise some money.

7. Credit card debt: If you find it difficult to pay off high-interest credit card debt, you might find it cheaper by taking a personal loan. Compared to credit cards, personal loans are often cheaper on interest rates (but as it is an unsecured loan, it generally has a higher interest rate then other loans) and can offer easier financial planning through regular fixed repayments.

In conclusion, it could be a good idea, in some situations, to take personal loans, but they have to be treated with extreme caution. Just take what you need, pay it back in good time, and avoid getting debt.

Personal loans generally have higher interest rates compared to other types of loans. The rates are influenced by factors such as, loan amount, credit score and repayment term. Always make careful review of your financial situation before applying for one and seek the advice of a financial advisor if needed.