Why because these are one of the most expensive loans as the interest rates vary between 16% and 30%. The extremely high interest rate is justified because the borrower doesn't need to provide collateral. The amount of loan is calculated by taking into consideration the current financial status of the borrower and his cash flow, such as salary, rental income, profit and loss in business, servicing of other loans, etc.
Can taking a personal loan be beneficial? Yes, it can, depending on the circumstances of the borrower. Here are three situations which justify taking a personal, provided there is no other option available, such as borrowing from parents or friends.
If you are repaying a loan that has a very high interest rate, while that of the personal loan is lower, it will be better to opt for the latter. You can use the personal loan to close out the higher interest debt. For instance, at times, when people require cash urgently, they borrow a small amount from money lenders, where they only pay the monthly interest and promise to pay the principal at a later time. This interest is usually on the higher side ranging from 1.5- 3% a month. If you can repay the principal in less than six months, you can keep paying the interest on a monthly basis. However, if you will take longer to repay the principal amount, it is better to go for a personal loan and use it to settle the earlier loan.
Say, you borrow Rs 1 lakh from a money lender for your sister's wedding. The interest is Rs 2.5 per Rs 100 a month (2.5% interest a month), which means you will have to pay Rs 2,500 every month as interest. In a year, you will pay Rs 30,000, while the principal would still be Rs 1 lakh, so your effective outgo will be Rs 1.3 lakh.
In such a case, you can take a personal loan to repay the money lender. A loan of Rs 1 lakh for two years at 18% a year means an equated monthly instalment of Rs 4,992. After two years, you would have not only paid off the entire loan, you would have paid only Rs 19,818 as interest, much less than the Rs 30,000 you would have paid the money lender as interest for one year. Also, as a personal loan is with a bank, you get the opportunity to create a good repayment record which will, in turn, create a good credit history.
If you are repaying a loan that has a very high interest rate, while that of the personal loan is lower, it will be better to opt for the latter. You can use the personal loan to close out the higher interest debt. For instance, at times, when people require cash urgently, they borrow a small amount from money lenders, where they only pay the monthly interest and promise to pay the principal at a later time. This interest is usually on the higher side ranging from 1.5- 3% a month. If you can repay the principal in less than six months, you can keep paying the interest on a monthly basis. However, if you will take longer to repay the principal amount, it is better to go for a personal loan and use it to settle the earlier loan.
Say, you borrow Rs 1 lakh from a money lender for your sister's wedding. The interest is Rs 2.5 per Rs 100 a month (2.5% interest a month), which means you will have to pay Rs 2,500 every month as interest. In a year, you will pay Rs 30,000, while the principal would still be Rs 1 lakh, so your effective outgo will be Rs 1.3 lakh.
In such a case, you can take a personal loan to repay the money lender. A loan of Rs 1 lakh for two years at 18% a year means an equated monthly instalment of Rs 4,992. After two years, you would have not only paid off the entire loan, you would have paid only Rs 19,818 as interest, much less than the Rs 30,000 you would have paid the money lender as interest for one year. Also, as a personal loan is with a bank, you get the opportunity to create a good repayment record which will, in turn, create a good credit history.
A personal loan can also be used to pay off a substantial credit card balance that is being rolled over for months. Paying just the minimum amount on the card bill will not help you as the interest is charged over the total bill amount and is very high, usually 2.5-3% a month. It's better to divert the money to paying the EMI of a personal loan. You could save 16-30% depending on the rate of interest you are able to get on the loan.
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