The thing about financial emergencies is that they crop up unannounced. You don’t know when you will need money for an unforeseen medical expense, repairing a leaking room, or fixing a bump on your car.
A majority of the working population lives paycheque to paycheque and doesn’t have the capacity to undertake hefty financial expenses when required.
Traditional loans, while help people manage such emergencies effectively, are slow and have a long-drawn procedure. Most banks take several days to approve and sanction loan amounts and conduct several rounds of verification.
Why People Borrow Money: Top Reasons
People may need to borrow money for many reasons. Some of the leading causes are:
- Emergencies: One of the top reasons people borrow is due to unexpected expenses like medical bills, car repairs, etc. Although the best way to handle emergencies is to rely on an emergency fund, people may not have access to a significant amount of capital and may end up borrowing.
- Buying a car or house: When you are purchasing something expensive, you may not always have enough cash in hand. For instance, if you are purchasing a home or a car, you need substantial amounts of money to make down payments and installments. A loan in this situation is a practical option as it spread the expenditure over a long period of time and helps you manage the high cost by breaking it into smaller EMIs.
- Travelling expenses: You may need to borrow money to take your dream vacation. Though it makes more sense to save up for your dream vacation, however, if you have a unique opportunity to travel, you may need quick access to some funds. If you don’t have ready cash available, the next best thing is to take a small travel loan.
- Consolidation of Loans: You may need to borrow money for consolidation of different loans, like credit cards, student loans, etc. Debt consolidation makes it easier for you to manage your loan instead of having to deal with multiple loans and varying EMIs.
- Higher education: While higher education in India is much more affordable than outside, people may find it difficult to pay the higher fees of private institutes or premium management institutes. Thus, many students, or their parents, take loans to fund education.
- Starting a business: There are several expenses associated with starting a business, like purchasing or renting space, hiring people, buying inventory, purchasing machines, etc. Very few people have the required capital to fund all these expenses from their own pocket, and most businessmen take loans to start their business.
Pros and Cons of Taking Loans
While we have discussed the reasons for borrowing money, taking a loan might not be the best possible move in every position. Let’s take a closer look at the pros and cons of taking a loan:
- Guaranteed access to funds: Once your loan application is approved, you will get the required amount of funds for sure. Thus, loans are a secure way to gain access to high amounts of funds.
- Easier management: The expenditure of a big-ticket purchase is spread evenly over a longer period of time, as opposed to a big setback.
- Multiple usage: While loans are borrowed for specific purposes, personal loans can be used as per your requirements without any restrictions, even for multiple uses.
- High credit score: Most banks require high credit scores before approving loan applications.
- Impact on credit history: Missing EMIs and defaulting on loans can create financial problems and also impact your credit score negatively.
- Additional charges and fee: Banks and financial institutions charge variable interest rates and additional charges, thus leading to unpredictability regarding EMIs.
Various Options Available to Borrowers
Traditionally, informal sources of credit have been the major ways of taking loans in our country. Thankfully, there are ample options for a borrower in today’s day and age, which include a mix of both official and unofficial credit sources. Here are a few prominent ones:
- Borrowing relatives or friends
It may be difficult to swallow your pride and ask for money from your friends and family, but it is one of the quickest ways to borrow money and will be easier on your pocket as well. Most of the time, your friends and family members will not charge you interest on the money you borrow, and would also give you ample time to repay the money.
However, on the flip side, if you don’t pay back the money, your relationship could get into trouble. It is best to clarify the terms of the loan at the time of borrowing the money; particularly about when and how you will repay it in order to prevent any confusion in the future.
- Public and private banks
All public and private banks offer loans for a wide range of purposes, including wedding costs, home improvement/repair, medical costs, travel, purchasing car or home, or pursuing higher education, etc. This helps the borrower find the perfect loan product, which is best suited to their needs. For businesses, banks offer more options like term loans, cash credit, and equipment financing loans. Individuals can avail home loans, personal loans, auto loans, and education loans as per their requirement as well.
- NBFC’s or NBFI’s
Non-banking financial companies (NBFCs) and non-bank financial institutions (NBFIs) lend money to individuals and businesses; however, it is important to note that they are not recognized banks. These institutions have more relaxed policies towards customers, and you can get a loan even if you have a low credit score. The disadvantage is that NBFI’s usually charge a higher rate of interest than a bank.
- Online lenders
Many online lenders offer quick access to instant cash loans at a reasonable rate of interest. Lenders like Paysense offer loans up to Rs. 5, 00, 000 and provide same-day approval to loans as well. What’s more, most online personal loan applications take only a few minutes to process.
Online lenders will also give out loans even if you have a bad credit score at a higher rate of interest. Online lenders have gained a strong foothold in the industry by virtue of simple application processes, clear terms and affordable charges and have emerged as a significant source of personal loans in the country.
- Government organisations
India, there are some government schemes as well as special organizations which extend loans to help the lower or growing sectors of the society. NABARD (National bank for agriculture & rural development) gives out loans on attractive interest rates exclusively to the rural population. These organisations aim to support the growing sectors of the economy, and their policies towards borrowers are relatively more relaxed.
- Life insurance companies
You can also take up a loan against your life insurance. You will need to check the loan amount you are eligible for; it is usually 85%-90% of the surrender value of the policy. The rate of interest charged on these loans is based on the premium amount already paid. The higher the number of premiums paid, the lower will be the interest amount charged. While you may choose to repay your loan over time, if you don’t do so, it will reflect in your policy value.
Collecting small amounts of money from the public, or crowdfunding has emerged as another popular source of borrowing money. The best part crowdfunding is that the borrower gets a lot of flexibility in terms of interest rates, repayment structure & collateral security. The downside of this loan is that there is no guarantee of success, and you may or may not be able to reach your goal amount.
- Advance from your employer
Some organisations offer their employees the option to take an advance on their future salary. Mostly for small amounts, these loans are adjusted in the next salary. While some companies might levy a small fee, some offer it without any conditions. You will obviously have to clear all dues in case you leave your job mid-way.
Better Alternatives to Taking a Loan or Borrowing Money
Conventional wisdom says that loans must always be a measure of last resort. So what are the alternative ways in which you can take care of your finances when needed? Let’s take a look:
- Emergency fund
Maintaining an emergency fund can serve as a great support in times of crisis. Ideally, an emergency fund should constitute at least 6 months of your living expenses. This money can help you in times of financial crunch and is one of the best ways to save money and become more financially independent.
- Set a savings goal
Set a savings goal in place and put aside a specific amount each month from your salary. You can create a fund for an upcoming holiday, your wedding, or any other purpose. Start contributing an amount that you feel is right, and eventually increase the same with time.
- Limit your expenses
Take a hard look at your bank account statement to understand your spending habits. If you find that one habit is taking an overwhelming majority in your finances, consciously start limiting the same. In today’s age of convenience, it is very easy to mismanage your finances by spending recklessly. Commit to going out or eating out only once a week, instead of 2-3 times in a week.
In case you are planning to make an online purchase, leave the product in your cart for a few days, and avoid impulsive buys. Better yet, make a monthly budget to account for all your expenses and stick to it. This might be hard at first, but with time, you will begin to see the benefits of the same.
- Take up a part-time job
While many people have a passive source of income to supplement their main one, not everyone has the resources to set up the same. That means you need to take up a side gig to earn some extra money. Look up local jobs in your neighbourhood and select the ones that take the minimum time and effort from your end. Make sure you use this additional income judiciously and save a substantial part of the same to ensure that your hard work is making an impact on your finances.
Financial independence is a goal we must all aspire for. Being financially prepared in emergencies gives you the confidence and strength to fight back and eliminates the stress of sourcing money immediately. However, there might be times when you are forced to take a loan or borrow money.
There are many methods of borrowing money, and if you have found your self in a situation where you don’t have the necessary funds to cover the unexpected cost, you have no option but to take a loan. Before you do so, make sure you have considered the best choice and source of your loan and understand the terms of the same.
Finally, remember the most important rule about borrowing: borrow what you need and pay it back on time.
If you require a collateral-free instant loan, without having to submit your credit score, get the PaySense mobile app and create your profile to determine how much money you can borrow. PaySense offers loans up to Rs. 5, 00, 000 to all customers who meet their eligibility conditions. To know more about personal loans at PaySense, please write to us on [email protected].
Apply for Loans of upto ₹5 Lakhs easily using your phone or laptop, and pay back on low EMIs