Using personal loans to fund a career shift: what you should know

Why people use personal loans for career change
Career changes usually entail upfront costs in the form of tuition for reskilling courses, relocation expenses, or even sustaining family costs during a period of unemployment. Since personal loans are not backed by collateral, they provide convenient access to money without drawing on long-term funds or retirement savings.

Factors controlling loan eligibility and approval
Banks and NBFCs look at credit score, stability of income, and current dues while approving a personal loan. High credit score enhances likelihood of receiving a loan with reduced interest rates. For individuals changing jobs, lenders are likely to look closely at current work status. Persons who are likely to resign without immediate new employment should apply well in advance, as chances of approval are likely to be lower once steady income ceases.

Interest rates and EMI obligations
Interest rates on personal loans are higher compared to secured loans, 10% to 24% per annum, depending on the borrower's risk profile. Careful budgeting of monthly EMIs should be done, especially if income during the transition phase will be uncertain. Non-payment of EMIs can destroy credit history, raising future borrowing costs. Personal finance advisors recommend using only the absolute minimum needed to finance career transition costs.

Personal loan substitutes and risks
Personal loans advance money fast but result in debt, which is a money source of stress in a career break. Savings may be tapped, low-return investments may be cashed in, or education loans taken if the amount is for formal education. Employer plans or fellowships are also selected by some professionals. Tapping these sources first ensures that money is borrowed only as a last choice and not the first one.

Long-term money planning is essential
Taking debt for career advancement may be worth it if it attracts better earning prospects, but realistically needs to be planned. Borrowers also need to decide how quickly they will repay the loan when they resume earning. Saving an emergency fund is also essential so that EMI repayment is not compromised even if career transition takes longer than expected. Strategic planning reduces stress and economic hazards.

Role of financial discipline during transition
A career transition personal loan functions best when accompanied by strict budgeting and judicious expenses. Borrowers are also encouraged to prioritize basic expenditure as the first priority and avoid inflation of career-related expenditure until the new vocation generates stable income. Track cash flows during this period to allow timely payment of EMIs without disrupting basic expenditure. Spending loan proceeds wisely — strictly for career essentials — prevents debt from snowballing into an additional financial burden.