Personal loans are one such financial instrument that comes with zero collateral. These are excellent tools to meet your short-term financial requirements. One very important factor that makes personal loans distinct from other types of loans is that the amount sanctioned through these loans can be used for any purpose/ purposes such as marriage, vacations, medical expenses, home remodeling, etc. Even with all this flexibility and choice of application, personal loans still are not a commonly used financial facility. Whereas mortgages require the home as collateral, auto loans require the automobile purchased as collateral, these loans are zero collateral loans.
Financial institutions have made the process of availing a personal loan quite seamless and flexible. However, following some measures, borrowers can make sure that they make the best out of their personal loans. Below are some of the ways how one can reap the maximum personal loan benefits from their personal loans.
- EMI Optimization: One way of making the best use of personal loans is by optimizing the equated monthly installments (EMIs). Borrowers should ensure that the EMI’s they got to pay shall never exceed more than 10% of their income. Though with the emergence of technology, it has become very easy to verify the documents and get a loan, one must never forget the basic principles of debt. In case the equated monthly installments get too high i.e. more than 10% of the monthly income, the long term financial goals such as saving for retirement, child’s educations, etc. of the borrowers might get disrupted. Therefore, borrowers should ensure to calculate their EMIs prudent in advance to safeguard against this instability
- Regular Payments: Personal loans are very instrumental in inculcating the habit of financial discipline. If paid on time. These are the best tools to boost the credit score. This credit score helps the borrowers in availing quicker and cheaper loans in the future. Therefore, one must never miss their EMIs on a personal loan. Since these loans are unsecured, banks track these loans by looking at the records. A good record gives the credit score a good boost and thus helps in a better financial position
- Short Tenures: It is advisable to keep short tenures for the repayment of a personal loan. Keeping long tenures leads to end up paying more interest. Since these loans are smaller as compared to home loans and auto loans, the customers should ensure to repay them in a short period. Paying these in time again helps in improving the credit score and making it possible for the customer to avail of other loans
- Never Borrow to Invest in Equity: Investing is often looked like a very smart idea among the general audience. There are many people out there who constantly push people into investing. You might listen to multiple tips on investments that might lure you into taking a personal loan for the investment. The greed of getting exemplified returns may lead you into trouble instead. It is too risky to put the borrowed amount in equity. Always ensure to avail of a personal loan for a good and fruitful purpose
- Do Not Borrow for Facetious Spending: Borrowers should be thoughtful while availing of a loan. Though this amount is available immediately without a security deposit, it does not mean that it comes for free There is interest chargeable on every loan that you take. Therefore, one must ensure not to put this borrowed money in frivolous spending such as alcoholism, lavish spending, etc. This amount should rather be used for home remodeling, weddings, educations, etc. which would give increased returns in the future
- Insurance: Personal loans have evolved over a while. Besides making the whole process digital and paperless, one very important feature of some best personal loans is that these come with insurance. In case the borrower faces some crises, the family should not be the one who bears the cost of the loan. In such cases, the insurance partner comes to the rescue. Most of the financial institutions that provide personal loans, also provide this facility of insurance. Therefore it is a good idea to apply for insurance while availing of a personal loan
- Refinancing High-Interest Debts: In case an individual has some high-interest debts such as an auto loan or a home loan, or in case he has a loan he availed with no credit history, in that case, he can choose to avail a personal loan to repay the debt and save himself from paying high-interest rates. Personal loans usually come with lower interest rates as compared to these loans. This will enable the borrower to repay the personal loan with less interest as compared to the high-interest debts
- Consolidating Debts: Another very discrete way to utilize the amount sanctioned from personal loans is to consolidate several other debts such as credit cards and other loans of high interest. Trying to meet the EMI requirements for several such debts can be a little challenging and the borrower might miss out on one or the other. In such cases, it is a good idea to combine all of these under one head. This is one of the most common reasons people take personal loans. This helps in clubbing various debts into one and in turn helping the borrowing manage their debts