Personal loans for lifestyle needs, is it financially worth it?

Date : 21/12/2021
Read: 4 mins

Wondering if a personal loan can be suitable to cover your lifestyle needs? Let’s find out.

With easy credit options available these days, such as personal loans, it is easy to be tempted. Of course, personal loans can be very convenient. What’s more, attractive personal loan interest rates are a cost-effective solution when you need funds in a hurry. Given this ease of availability, you may feel inclined to take a loan for personal use and to cover your lifestyle needs. But is this a financially sensible option? Read on to find out.

Does it make sense to take personal loans for lifestyle needs?

There’s no blanket answer. Yes, there are several benefits to personal loans. They offer flexible repayment schedules, the monthly repayment schedule (also known as EMI or equated monthly instalments) can be chosen as per your income and budget, and personal loan interest rates are quite affordable.

There are several banks, fintech companies, and non-banking financial companies (NBFCs) in India that let you borrow money for various needs. Loans offered by fintech companies are also a lot more economical and can be customised as per your preferences.

The tax benefit on personal loans can be another advantage. Even though personal loans do not offer any direct tax deductions, you can claim a deduction under Section 24 on a personal loan taken to buy or construct a house. The limit is up to Rs. 2 lakh for a self-occupied house, but if the house is put on rent, there is no such limit. In addition to this, the personal loan interest is a tax deductible expense if used towards business expansion. There is no limit on the amount that can be claimed here. Lastly, if you use a personal loan to purchase assets like shares, jewellery, non-residential real estate, etc., you can claim a tax benefit when you sell the assets.

However, a personal loan is still a form of debt and can impact your financial goals. Paying back a loan can hamper your savings and monthly budget. Dependency on a personal loan also affects your credit score. If you have too much debt, your credit score falls. As a result, the interest paid on personal loans or any other kind of loan would likely be higher because the lender will doubt your ability to clear the loan on time.

Moreover, some investment options like mutual funds, direct equity, etc., may offer higher returns than the tax deductions available on personal loans. So, investing in them can offer you greater returns minus the loan liability.

Are there any other ways to fund your lifestyle needs?

Yes, there are several other ways to cover your lifestyle needs. Here are some suggestions:

You can invest your money for specific goals instead of opting for a loan. Investing allows you to grow your money over time and beat inflation. Mutual funds, direct equity, bonds, exchange traded funds, gold, insurance investment plans like ULIPs (unit-linked insurance plans), endowment plans, etc., can help you accumulate funds for your lifestyle needs as well as save on tax.
Planning your purchases in advance also helps. This allows you to systematically save for your future necessities instead of taking a loan for personal use. You can put money in your bank savings account or open a fixed/recurring deposit and use the money later.
Being mindful of your needs and wants is essential too. Even though you can get attractive personal loan interest rates with quick disbursements, it’s better to not rush things. Learn to spend money wisely!

Last words

It is essential to be rational and prudent when dealing with money. While a personal loan can be an excellent choice to meet an immediate financial requirement, being attentive to their impact on your overall expenses is vital.