Personal loan vs Other loans

Personal loan v/s other loans

One of the basic points that have to be always followed when using a Personal loan is that the amount should be used only when the other low-cost borrowing options are not available. For example, if a person wants to use some amount for, say, repairing a house then a personal loan will make sense only when specific loan for this purpose is not available. In most cases, loans for a specified purpose are cheaper than a personal loan.

There is a process that has to be followed for getting home loan, car loans and so on. There is a check of the details provided by a borrower, and only when the purpose and position of the person meets the loan eligibility criteria laid down for giving the loan, does the process move forward. The bank will also take a close look at the ability of the person to repay the loan and then sanction a specific amount. The outcome of this is the loan for specified purpose is available at a lesser cost than a personal loan where all this background work is not done. Sometimes due to some reasons a normal loan is not made available and the person is forced to find other ways such as a personal loan.

A reason why a lot of people face repayment problems is that they use the personal loan route to take a loan when they are denied loans elsewhere due to a low income or repayment ability. If the income of the person is less then it is likely that he/she will not meet the criteria and be denied a loan. Using the personal loan route will not solve the repayment problem but actually add to it in the future.

Taking advantage of the situation
There might be a situation when an individual can actually get a good deal by taking a personal loan. A situation in the market could raise the loan rate for some category of borrowing to a high level. This happens when the risk in that category increases significantly. On the other hand, if a person has a good track record with a bank then he/she might get a personal loan at a rate lower than that on specific loans.

The difference in two loans might be small, in the region of a couple of percentage points, but this is a good saving for the person. In such cases personal loan makes good economic sense. However, such a window of opportunity is open for a very short period of time and hence has to be taken when available. At the same time it might not be for everyone but a few people so one has to check their own position and then make the calculation. This can result in some positions of financial benefit for the individual.