Can a personal loan help you tide over a financial crisis?
Even in a financial crisis, a personal loan used to pay bills like rent, utilities or medical costs is an expensive option and should be considered only after exhausting other options, such as loans from friends and family, crowd-funding etc.
By ET CONTRIBUTORS | Updated:
Does a personal loan help deal with a coronavirus-led financial crisis?
Over the past couple of months, Naren has been getting calls from various lenders offering personal loans. He finds it reassuring that he can actually get a personal loan approved for himself in a couple of days should the need arise. He has been a good borrower and does not believe in reckless loans and maintains a good credit score of 710. However, he wonders if he should use a personal loan to fill the ever-growing gap in his monthly budget caused due to recent salary cuts. Is the current crisis a good time to get a personal loan?
Naren realises that in normal circumstances, taking a personal loan makes sense when it’s the least expensive form of credit and is used towards something that has the potential to increase his financial standing, like debt consolidation or home improvement without stressing his budget. On the other hand, a personal loan used for discretionary expenses, like a vacation can be expensive and unnecessary. Having said that, even in a crisis, a personal loan used to pay bills like rent, utilities or medical costs is an expensive option and should be considered only after exhausting other options, such as loans from friends and family, crowd-funding etc.
Naren would most probably easily qualify for a personal loan, given his credit history. In response to the crisis, some lenders have increased credit score and income requirements, making it more difficult for borrowers to qualify for a loan or get a low rate.
It also means shopping around for a loan is now more important than ever. NBFCs typically offer loans with more flexible terms than banks. Naren must check with his bank as he may not only have a better chance of qualifying for a personal loan but also access to lower rates and special features. If a friend or family member is willing to co-sign a personal loan, adding them to a loan application can help Naren’s chances of approval or get a lower interest rate.
In order to choose the lender, Naren must list down the features that are important to him. He must consider how much it will cost and how soon he needs the funds. He might want to use pre-qualified offerings to check what rate and term he may be receiving, while others may specialise in fast funding. He must also be sure about the repayment period and terms. After Naren has compared offers and selected a loan with the lowest rate and payments that fit his budget, he will be able to formally apply for the loan.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
Naren realises that in normal circumstances, taking a personal loan makes sense when it’s the least expensive form of credit and is used towards something that has the potential to increase his financial standing, like debt consolidation or home improvement without stressing his budget. On the other hand, a personal loan used for discretionary expenses, like a vacation can be expensive and unnecessary. Having said that, even in a crisis, a personal loan used to pay bills like rent, utilities or medical costs is an expensive option and should be considered only after exhausting other options, such as loans from friends and family, crowd-funding etc.
Naren would most probably easily qualify for a personal loan, given his credit history. In response to the crisis, some lenders have increased credit score and income requirements, making it more difficult for borrowers to qualify for a loan or get a low rate.
Many have suffered salary cuts over the last year because of businesses not doing well, in turn because of the global coronavirus crisis. Transitioning to a lower payscale can be extremely distressing. In such a scenario, thinking of borrowing as a way out, to fund even the most basic of needs, is only natural. Lenders have been reaching out to people, offering personal loans. Now if you are in a similar position, you may find it reassuring that you can actually get a personal loan approved quickly, if you get really strapped for cash. The loan will come through even more easily if you have been a good borrower with a strong credit score. So should you use a personal loan to fill the gap in your budgets due to pay cuts? Is the current crisis a good time to get a personal loan?
It also means shopping around for a loan is now more important than ever. NBFCs typically offer loans with more flexible terms than banks. Naren must check with his bank as he may not only have a better chance of qualifying for a personal loan but also access to lower rates and special features. If a friend or family member is willing to co-sign a personal loan, adding them to a loan application can help Naren’s chances of approval or get a lower interest rate.
In order to choose the lender, Naren must list down the features that are important to him. He must consider how much it will cost and how soon he needs the funds. He might want to use pre-qualified offerings to check what rate and term he may be receiving, while others may specialise in fast funding. He must also be sure about the repayment period and terms. After Naren has compared offers and selected a loan with the lowest rate and payments that fit his budget, he will be able to formally apply for the loan.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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