If used properly, personal loans can actually help you save money in several ways.
An ever-increasing young population in India is all set to redefine the country’s financial landscape. Driven by the instinct of instant gratification, thousands of young Indian individuals are often seen opting for personal loans every now and then. Whether it is about funding that fairy-tale wedding or going for that dream vacation to Machu Pichu, Indians are not afraid of availing loans in order to realise their dreams.
What is a Personal Loan?
A personal loan is an unsecured loan availed by individuals from a bank or an NBFC in order to meet their personal needs.A personal loan is unsecured in the sense that it is not backed against any collateral. That is why the interest rates charged on such loans may be a bit higher than those charged on home or car loans.
While this may be the case when compared with loans where a large sum of money or collateral is involved, interest chargeable on personal loans is lower than on cash borrowed via credit cards. And while personal loans help you take care of unexpected expenses or any other requirement, they can also help you save money. Yes. If used properly, personal loans can actually help you save money in several ways. Some of them are explained below:
1. Lower interest rates
As discussed, interest rates charged on personal loans are lower than those charged on most credit cards or even home loans. Therefore, personal loans can be used to make purchases in lieu of credit cards as a money-saving strategy.
2. Consolidation of debts
You can avail a large, low-interest personal loan to pay off your other high-interest debts. By consolidating your debts like this, you can save money on a high-interest student loan or your credit card bill, for example, by repaying them faster or at once using a personal loan.
However, remember to check with your bank about their prepayment policies as some money-lending institutions charge penalties for not completing the tenure of a loan or charge additional fees for foreclosing it.
3. Claiming tax benefits
While personal loans do not offer any tax benefits in general, however, if they are taken for the purpose of renovating your house or making a down payment for it, then you are eligible to claim the benefit of tax deduction of up to ₹2 lakh under Section 24B. In order to avail of this benefit, you will have to produce proper receipts and documents before the loan-issuing bank.
4. Smart repayment plans to increase savings
Before availing a personal loan, you can choose to use the most appropriate repayment plan depending on your current and foreseeable financial status to enhance your savings. For those who are expecting their financial situation to get better in the near future, due to a promotion, for example, can apply for the step-up repayment option. The EMI scheme starts off at low interest rates that gradually increase over time.
Another option, as discussed above, is prepayment. By foreclosing your loan, you can save up on interest payments. But it is important to verify beforehand whether this option will incur a penalty or not.
The author is COO and CoFounder, MoneyTap