Personal Loans are expensive. Does it make sense to take them?
Sahil, an HR Manager from Pune, had one solution to every financial problem: Take a personal loan. Daughter’s wedding? Take a personal loan. Medical emergency? Take another personal loan. A costly family vacation? Of course, you must take a personal loan. One day, a colleague questioned him. He argued that a personal loan was expensive. Then why did Sahil turn to such an expensive solution every time? Sahil just smiled and explained that sometimes opting for an expensive solution makes sense. Here is what he told his colleague:
Why are personal loans expensive?
Before justifying his decisions to take personal loans, Sahil explained what made a personal loan expensive. He pointed out that a personal loan is an unsecured loan. So, the risk of default is high. The lender relies on the borrower’s promise to repay the loan. To balance out the high risk, the interest rates are high. This is supposed to prompt the borrower to repay the loan quickly.
When are costly personal loans justified?
Though personal loans are costly, certain factors can justify the cost. Some of those are:
- Flexibility of usage
Specialised loan products cater to specific financial needs. These include home loans, education loans, and car loans, among others. A personal loan is much more flexible. You can use it to fund any personal or even business-related expenses.
- No need for collateral
A personal loan needs no collateral. This is why the interest rate is higher. But such a loan is beneficial for individuals who have no assets to pledge as collateral. Such individuals rely on personal loans to fund their financial shortages.
- Easy approval
An unsecured loan also means easy approval. Personal loans are easy to get. The prospective borrower can use the loan eligibility calculator to check his/her eligibility. The personal loan EMI calculator can tell the borrower what the EMIs will be. The borrower can then apply for the personal loan online. Very few personal loan documents are needed. The loan is granted easily and quickly. So, individuals with the need for immediate funds turn to personal loans. After all, they are available quickly.
- Short-term needs
Sometimes, people face a short-term funds crunch. As the time frame is small, the high interest rate of a personal loan does not make much of a difference. So, individuals with an urgent financial need take personal loans. The higher interest rate can be justified then.
- A bad credit score
How do you take personal loans with a bad credit score? It is quite easy. Even individuals who have a bad CIBIL score can take a personal loan. For them, the high interest rate is not a factor because they do not have a choice. They can at least get the funds easily.
Sahil concluded that a personal loan can be a boon in certain situations. Though expensive, it is a good choice for many individuals. And he was one of them. But then, it would be wise for borrowers to first find out if such conditions are applicable to them.