Personal loans should be one of the last financing options as they come with a high price and can ruin your financial plan.
The festive season has set in with a flood of offers and discounts hitting the market from retailers on merchandise to spur purchases. With the enticing bait being thrown at you, it is quite easy to get lured into spending, sometimes beyond one’s financial abilities.
While goods come at a discounts, financiers would press you to avail personal loans for high-ticket purchases. But should you avail of high-cost personal loans? And what could be the alternative financing options?
Financial advisors feel personal loans should be one of your last financing options as they come with a high price and can ruin your financial plan. Such loans can come with annual interest of around 20 per cent or more.
“Personal loans are very costly, and should only be taken as a last resort in case of an emergency. One should not opt for a personal loan, to fund discretionary expenses like a vacation, or an extravagant wedding etc. Doing so, will increase your debt burden and also crunch your cash flows,” Amar Pandit, Founder & Chief Happyness Officer at HappynessFactory.in.
Anil Rego, Founder and CEO, Right Horizons feels availing personal loans for festive purchases is an indication of one’s inability to handle personal finances properly. “A personal loan for doing festival spending shows financial indiscipline. Personal loan was not conceptualised for spending but for personal emergencies, such as medical emergencies, when there is no other way to get funds. With loans coming with interest rates of 12-18%, they are not cheap” Rego told Moneycontrol.
He says personal loans should be availed only when all attempts at getting the required money have failed. “Don’t use such loans for shopping, vacations and other extremely short-term goals. Don't get fooled by easy EMIs. Focus on total interest payment and charges if any for prepayment,” says Rego.
Aditya Kumar, Founder & CEO, Qbera, says personal loans can be helpful in certain situations. "If you have a longer-tenure financing requirements, personal loans are the best option. If you need, say, Rs 2 lakhs, and might take 2 years to repay it, a personal loan would be a better choice because the interest rate is levied on the reducing balance rather than the whole amount," Kumar said
Along with this, promote their financial products and services by offering heavy discounts, waivers and reduced rates during festive seasons, which will be a chance to save more money. "Since festivals are considered to be auspicious time for big purchases/events (like buying a DSLR Camera, two-wheeler/bike etc or events like wedding or your first international trip), this could be a frugal option for you," Kumar said.
However, he says, if one is keen on availing personal loan, one should do their homework properly. “The borrower should always research and study the market before choosing a lender. It is easy to get so enamored with the one offer that you forget to look at what the rest of them are offering. Do not just compare the fees and interest rates. In fact, calculate the overall price of the loan when comparing. Be quick to spot problematic clauses and this can be possible only if you read through the fine print,” says.
So, in case you are looking a borrowing for your festival purchase, what are the other options that you could look? Qbera’s Kumar says there could be multiple options. “There are many ways to fund your big-ticket purchases like furniture, appliances, vehicle and jewelry among others. You can keep aside a little from your salary every month and use that amount, swipe your credit card, get a loan (secured or unsecured), borrow from friends/family, go for a P2P loan, opt for retail EMI, get advance salary from your organization and so on. Among these, credit card loans and personal loans are the most oft-opted ways,” he said.Amar Pandit says the alternatives to personal loans could be bank overdraft, loan against property, loan against investments (FDs, Shares, Mutual Funds, Gold, PPF, Insurance policies). “Before opting any of the above, one should consult their financial planner/ advisor who will help them to take the right decision, based on their overall financial situation,” Pandit says.