As banking facilities are becoming more accessible to more and more people, the popularity of personal loans is also increasing. Unlike home loans or business loans, personal loans can be used for any purpose such as marriage, financial emergency, home renovation, consolidating debts, etc.
Let us understand the impact of personal loans on our financial planning.
According to a recent study, 53% of Indians took a personal loan before reaching the age of 30 and 22% of Indians took a personal consumer loan before the age of 25. Similarly, 57% took their first credit card before the age of 30. 24% of Indians took their first credit card before the age of 25.
This study shows the popularity of personal loans among young people. The popularity pf personal loan is going to increase in future.
Before understanding the impact of personal loans on financial planning, let us first understand what a personal loan is.
What is a personal loan?
A personal loan is a type of unsecured loan offered by banks/financial institutions based on criteria like employment history, income level, credit score, repayment capacity etc.
The personal loan amount ranges from Rs.10,000/- to Rs.50 lakhs. The interest rate varies from 10% to 36% depending on several factors mentioned above
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The Benefits of Personal Loan:
Availability of funds
Personal loans can be used for multiple purposes such as weddings, debt consolidation, emergency expenses etc.
Debt consolidation
If a person has various loans with high interest rates such as credit card loans, he can take a personal loan at a lower interest rate and repay all the high-interest loans. Thus, there is a saving in interest expenses which can be used for other financial goals.
Credit score
Timely repayment of personal loans helps in improving the credit score. A high credit score will help in availing loans on more favorable terms including lower interest rates in the future.
The Disadvantages of Personal Loan:
Management
Taking a personal loan increases the debt burden on the individual, therefore, proper management of personal loans is required. If an individual is unable to repay the personal loan on time, it will negatively impact his credit score, making it more difficult to take loans in the future.
Interest Rate
Personal loans have a higher interest rate than any other loan. Higher interest rates result in more cash outages. Therefore, it is better to avoid unnecessary personal loans.
Long-term goals
Repaying personal loans from an early age allows the money to be used for investment purposes
Monthly Budget
Paying the EMI of a high-interest personal loan can significantly impact an individual’s monthly budget. Therefore, it is essential to assess the repayment capacity before taking any personal loan.
Integrating personal loans into financial goals
1. Personal loans can be beneficial for personal finances if used correctly.
2. While planning the monthly budget, make sure you include the monthly EMI. Make sure you have enough disposable income after all your monthly expenses.
3. Consider pre-paying/partially paying your loan if possible. This will reduce your loan and also save a lot on interest costs.
Conclusion
A personal loan is very helpful if used properly but before taking any personal loan make sure you understand the pros & cons. I hope this poost helped you to underdtand the impact of personal loans on our financial plannings.
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