When Would Expensive Unsecured Loans Make Sense?
One may not be able to survive today without taking a loan. We access credit facilities for various reasons. Right from buying a house to education, to furnish the house or to buy that new electronic item that is priced high. Each of these loans comes with varied interest rates. A secured loan will come at a cheaper price than an unsecured loan. And the gap on interest being charged between these two broad categories of loans can be quite high. In certain cases it may run in multiples. It is always better to assess if taking an unsecured loan would actually make sense given that the rate of interest can be anything between 15% to 30%.
So when would it be prudent to pick up such high cost unsecured loans popularly known as personal loans in India. Let us look at the situations:
To consolidate multiple loans and debts
There could be a situation where one has got exposed to multiple loans on account of various requirements that keep arising in life. To manage several loans with varied repayment dates can be daunting. Missing on any one of them can have severe impact on the financial and credit life. So it may just make sense to close all the loans from the proceeds of that bigger loan. This will help in having just one EMI hitting your account and can be tracked easily. Also this may be helpful in budgeting the month more effectively given the EMI gets cleared in one go and leaves you with funds available for other requirements.
To fund requirements of an exigency
Emergency can arrive at any time and gives little room for one to think of the cost of debt. One may while want to pick up a cheaper loan but given that the personal loan gets processed much faster and the disbursal happen in the account within hours, it may just be the right decision to go for that unsecured loan despite having to pay a much higher interest rate.
To pay off that high credit card outstanding
Credit cards if not managed properly can run a havoc and have all the potential to push one into a debt trap. So in case you have by any chance have over spent on your cards and the outstanding has gone beyond your means to pay off, taking a loan to clear the dues is definitely a wise decision. The cards’ outstanding get charged a very high interest rate apart from other fee and charges. In a situation where the card holder is paying part of the total outstanding, then any further fresh transaction will also attract interest right from the first day, meaning if one is not paying fully, there is no interest free credit period.
When you do not have a collateral
The unsecured borrowing comes at a higher rate of interest for the simple reason that it has no collateral attached for the lender to secure the money in case of default. But in case you do not have a collateral to pledge, then you may be left with no other option but to go with this form of borrowing.
To build low CIBIL score
Credit score is dynamic and is based on various factors including the various kinds of loans taken by you. So if you are looking at improving your credit score and do not have an active personal loan then go ahead and pick up that loan. The value of loan does not matter so you can go ahead and pick up a small ticket loan as well so that the impact of higher interest does not have major impact.
All loan products have their relevance but should only be picked up to fulfill a genuine requirement.