Personal loan as a short-term finance option

In the last few weeks, calls from telemarketers have already gone up asking you to sign up for personal loans. The difference this time is that most banks want to lend to their own customers and in many cases, customers are being offered pre-approved loans to cut down on processing time.
While a personal loan is a short-term finance option, it is often used by many for long-term needs. In the process, a borrower ends up paying up a higher interest amount if he fails to clear the loan on the due date. On the contrary, a personal loan can be a handy option if chosen with care.
How to make better use of a personal loan?
Some tips to help you make better use of a personal loan:
Compare total interest payable
A personal loan with an interest rate of 14-28 percent is a better option than a high cost credit card loan as the latter charges interest in excess of 35 percent.
The same holds good for those who are in the habit of taking hand loans which carry higher rates. For such borrowers, a personal loan would be a cost-effective option and more importantly, it enables the borrower to repay the loan in totality.
Repay the loan in short to medium terms
Often, salaried professionals use a personal loan as a component of property investment. The margin money of the property cost is funded by a personal loan.
The idea is good provided the borrower is in anticipation of some funds coming in a few months later, and is in a position to clear the loan. Or else, the loan amount should not be more than a few lakhs so that it does not pinch the borrower considerably.
For instance, if a property investor is short of funding to the extent of Rs 2-5 lakhs for a property which is valued in excess of Rs 50 lakhs, the implications would not be severe. On the contrary, if the borrower depends on the personal loan to take care of more than 25-30 percent of the property cost, the chances are that he would be unable to repay the loan in the short to medium terms.
EMI a determining factor in personal loan
Keep track of EMI
Unlike other loan products, the EMI is the determining factor in a personal loan.
Since the loan is for a shorter period of time, the EMI is much higher, which is also the reason why some struggle with their cash positions after signing up for a personal loan. Hence, a personal loan should be determined by the EMI component rather than just eligibility.
This will help the borrower to be realistic with the loan repaying capabilities and not get into a default.
Keeping good credit track record
Be a good borrower
Signing up for a personal loan may be the easiest thing to do but make sure to be a good borrower as non-repayment or lack of commitment towards repayment can tarnish the creditworthiness. With banks providing details of all borrowers to the common database under the Credit Information Bureau (India) Ltd (CIBIL), a negative entry relating to payment history can make it tough for all future loans.
Also, borrowers need to make sure to complete the documentation relating to disputed loans as a failure to do so may make it difficult for future borrowing.