You should evaluate the difference between liquidating debt investments and cost of borrowing first
A direct fall-out of a slowdown in the economy is borrowing gets tougher and banks start imposing tougher norms for borrowers. That was the case in 2009 till the government stepped in and eased the liquidity pressure. It's been almost a year since the government put in place some measures and the growth rates have been impressive.
Though it has had its impact on the inflation rate, the borrowing programmes have been on track both from corporate and government. This has also pushed up the sentiments to a great extent and fears such as job loss and negative growth rate are not words you hear on the street. Expectedly, individuals are back to their spending days and what has also helped them is the loan offers from banks. The offers of preapproved loans for cars and personal loans are once again doing the rounds.
While car loans and home loans are for specific needs, it is not the case with personal loans. The product being an unsecured liability, lenders don't have charge on this asset (from a banker's point of view). This makes the product an ideal candidate for non-performing assets and that is also the reason why banks are less than willing to lend this loan. In fact, the lending policies with respect to personal loans are a reflection of the bank's risk-taking abilities and its eagerness for a loan book expansion. Banks which are focused on growing the loan book are generally more liberal with their personal loan portfolio.
There has also been a change in the lending policies of personal loans with most banks preferring to rely on their internal customer base for lending. That would mean those who have healthy balances and bank habits are the preferred ones for this product. As the joke about personal loans goes, banks prefer to give loans to those who don't need it.
While the loan in recent times may have become a tough option, it is not a bad idea to keep the product as one of the options for your needs. When does it make sense to go for a personal loan?
As pointed out earlier, a personal loan is one of the high risk products for banks and hence interest rates are generally high. As a result, from a borrower's perspective, this factor needs to be kept in mind and hence should be explored only as a last option. For instance, a personal loan should not be considered if the individual needs more than five years for repayment. That would mean it can't be an option for funding property though in reality many have used it for the same purpose. The danger of such borrowing is that the real value of the asset would be substantially higher.
On the other hand, a personal loan can come in handy to bridge a short-term fund need. For instance, a personal loan for a couple of lakhs for a period of six months to one year would not be a big drain on liquidity.
Often, those who have comfortable balance sheets are made to choose between a saving and personal loan. For instance, an individual may be sitting on equity or fixed deposit investments and the question is whether to go in for a personal loan or withdraw the savings. If the investment is in a debt product, the choice has to be closure as the interest offered by a fixed deposit is often lower than the interest rate on a personal loan. In some cases, however, an employer may offer a concessional rate and in such cases, personal loans can be the alternative.
Even with respect to equity, withdrawal may make sense though many argue that the investment in the later stage has the potential to offer returns. However, returns from equity are not assured but the interest or EMI on personal loans have to be serviced at any cost. In such cases, equity which has delivered profits can be used to meet fund needs rather than a personal loan. After all, a loan is a liability at any time and is a more expensive option than own funds.
