Loans, housing finance etc:

Best Uses for Your Personal Loan
By Shiv N. Majumdar

Personal loan, as the name suggests, is a facility advanced to you looking at your personal information. Banks and Non-Banking Finance Companies (NBFCs) prefer to make available personal loans to managerial personnel in salaried employment.

These are not backed by any hypothecation of assets or collaterals and there are no guarantors for a personal loan (except for software employees).

As these loans are unsecured, banks and NBFCs have stringent requirements regarding your income, amount advanced, the area of the city you live in and the type of employer you work for.

A personal loan also carries the highest rate of interest (except Credit Card loans) and a lock-in period of six months or so during which you cannot prepay this loan. There are processing charges @ 1.5-3% of the loan amount and a prepayment penalty @ 2-3% of outstanding principal.

The amount of loan will vary according to your salary and repayment capacity but the period is restricted to 3 years (in some cases, up to 5 years). You will be paying an equated monthly instalment (EMI) consisting of both interest and principal repayment.

A personal loan provides a very valuable facility to the eligible group of people. It can make available liquidity within a period of 7 days from your application.

However, since a personal loan is an expensive mode of financing, its use to pre-pone a consumer durable purchase or an expensive holiday would add avoidable high financing costs for you.

There are, however, very productive and appropriate purposes for which a personal loan can be most fruitfully utilized:

In a medical emergency:
If you need to spend a sudden large amount of money in a medical emergency, which cannot be otherwise be arranged, a personal loan can be a godsend with its quick processing and absence of any requirement of a collateral or hypothecation. The repayment through convenient EMIs will allow you to absorb a sudden financial shock.

To part finance wedding expenses:
A personal loan can ease the pressure of wedding expenses by spreading out the cash outflow over a period.

To finance a deposit or an essential convenience while setting up a new household:
While setting up your household in a new city, you may need to finance a deposit for your rented house. You may also need some unavoidable immediate expenses on conveniences. A personal loan is handy in such a case.

In investing in a house or any other appreciating asset:
Initial investment in purchasing a house may require financing stamp duty and registration charges, besides a part contribution even if you opt for a housing loan.

For furthering education or training:
There are many part time courses, which can enhance your earning power through education and training. A personal loan is an ideal choice to hurry things up.

In launching a new career in freelancing:
Only you can gauge the potential in a new career in freelancing or in part time consulting. The initial investments in such a venture would not be too high and a personal loan can be a convenient financing option in such a case.