You need to use a personal loan judiciously as the interest rate is relatively high, says Srikala Bhashyam

Before the economic downtrend, it would have been hard to find a family without a personal loan in the cities. With the loan providing the comfort of easy funds with slightly higher interest rates (in the range of 14 percent), it didn't pinch very hard for many. After all, it saved the borrower from the hassle of a waiting period, making a few trips to the manager and more importantly, it was given without a request for some. The downtrend and the tight monetary situation in the economy have taken a toll on personal loans. In fact, many private banks have completely stopped disbursing personal loans while those that still offer them restrict it to their own customers.

While the product has its own set of advantages and disadvantages, much of it depends on its final use. For instance, a personal loan to clear the dues of a credit card is not a bad idea, but it can prove expensive if taken for funding a property. So, borrowers need to keep in mind a few factors while going in for a personal loan.

Use it for the short term

A personal loan carries a higher rate of interest as it is an unsecured loan. It is given purely on the basis of your income flow and in the event of non-payment, the banker has a much lower scope for recovery, despite the fact that many banks manage to recover it. Hence, opt for a personal loan only when you need funds for a short tenure. In fact, the upper limit for a personal loan should be three years even if your bank is willing to give you a five-year tenure.

Avoid multiple loans

If your banker is not willing to give you the desired amount, it is a clear indication that the loan amount is a stress on your finances. So, avoid taking loans from multiple banks as the pressure on EMIs can get unmanageable over a period of time.

Avoid it as an option for funding home

The property boom over the last few years prompted many to take desperate measures to acquire property. One of them has been personal loans to fund a property purchase. Many have used it to make the down payment or to make up the shortfall in a home loan. Not only has it proved expensive but disastrous for many, particularly for those who booked property with the idea of making quick returns.

Another asset which needs to be avoided with personal loans is equity as stock prices are volatile and don't guarantee returns at all times. If you are planning to make money in the current equity markets through a personal loan, it is better to avoid it as the equity markets don't assure returns but personal loans expect discipline with EMIs.

Courtesy:- Et dt:- 07-06-09