Personal loans can help you out when you need to borrow money for a variety of reasons. This type of lump-sum loan is paid back in monthly installments over a set term, usually ranging from one to seven years.
With any debt, it’s essential to consider how the payment will impact your finances, but there are many situations where a personal loan may be a good choice.
Just like it sounds, a personal loan can be used for personal reasons. Qualifying for a personal loan depends on several factors, including your creditworthiness. The stronger your credit score, the more likely you are to be approved.
A higher credit score can also translate to a lower interest rate on a personal loan. Personal loan lenders can also take into account things like:
- Your income
- Total monthly debt payments
- Whether you rent or own your home
1. Debt consolidation
If you have several outstanding loans with high-interest rates, combining them into one can help you reduce your monthly payment. This is called “debt consolidation,” and it’s one of the most common reasons people take out a personal loan. The personal loan often has a lower interest rate than some of the other debts you may have, which can reduce the total amount you will repay over its term.
Be careful if you use a personal loan to pay off credit card balances. One pitfall could be being tempted to charge new debt on those cards. You’ll need to practice self-control, or you could find yourself worse off than before you consolidated your debt.
2. Cover emergency expenses
A personal loan has a fully-funded emergency account, which covers three to six months of expenses. If something arises, you may need to resort to getting a personal loan. Emergency expenses could consist of unplanned medical fees, expensive car repairs, or even funeral costs. Any of these situations can quickly add up to a few thousand or even more. Even if you have insurance, in some cases you may have to meet a high deductible. A personal loan could help in these situations, which are often stressful.
Related Article: Tips on how to repay the loan on time
3. Make a big purchase
A personal loan could also finance a big purchase, such as a new appliance, car or engagement ring. You can also use it to pay for tuition, a wedding, or a vacation. In these cases, though, it’s best to consider your needs versus your wants. Buying a car can help you get to work. Paying for tuition can help you improve your career outlook. And replacing a defunct refrigerator or stove can help you maximize your food budget. If you’re using a personal loan for a large purchase, make sure the monthly payment comfortably fits your budget. And shop around for the best deal on that large purchase, so you aren’t tempted to get a loan for more than you need.
4. Pay for moving costs
If you’re moving due to a new job or family situation, taking out a personal loan may help you pay for the expenses. You may also need to purchase new furniture or household goods for your new home or pay for travel expenses. Before you take on debt to make a move, make sure that your new income will be enough to cover the monthly loan payment.
5. Remodeling a home
Remodeling your home can increase its value as well as make necessary repairs that protect your investment. A personal loan is one option for getting the funding for projects such as replacing the roof, updating the kitchen or finishing the basement. If you have equity in your home, you may decide to go with a home equity line of credit or home equity loan. However, personal loans could be a good choice since they don’t require collateral, which means you don’t put your home at risk if you’re unable to repay.
6. Start a small business
As the saying goes, “It takes money to make money.” A personal loan can be a good vehicle for getting the funding you need to start your own company. You can use it to hire a website designer, order initial inventory, pay your rent, or cover payroll until you start generating revenue. Make sure your business plan includes a way to make your monthly payments while you’re getting your business off the ground.
7. CIBIL Score Improvement
The CIBIL score of an individual is calculated on the basis of agility in payment of loan repayments and credit card repayment. When you take a personal loan of the loan amount and return it within the fixed time frame, you can improve your CIBIL score as it will improve your credit history and grow your creditworthiness. This also enhances the possibilities of the approved personal loan. Apply for a Personal Loan get a higher loan amount up to 30 lakhs at an attractive rate.
8. Higher education
While you may have prioritized your child’s career aspirations and making regular savings towards it, the ever-increasing education costs may cause some deficit towards such financial goals. One can take a personal loan to bridge such a deficit and enable their child to get admission into the desired college and stream, not allowing any financial constraints to alter such goals.
9. To Pay for long-distance relocations
Relocation within the city itself is an expensive affair. So naturally, when you move from one city to another, a lot of money is involved. You can always consider taking this loan to cover those expenses.
A personal loan could be more of use when there is little possibility for any other type of loans like housing loans, vehicle loans, etc. Personal loans are becoming more popular due to quick disbursal and low documentation. However, the interest rates would be on the higher side due to the lower payback period. In case of liquidity crunch or quick demand for money, personal loans are saviours.
We all want to make that extra money on the side, and if you really put your mind to it, you can make your ends meet. Do you think, the beggars on the road have no choice to make a living for themselves? They do have a choice. We gave them money, when they come to beg, is only encouraging them more, to continue begging. Even the roadside vendors, may not have their shops registered or may not even pay income tax. Two main reasons could be literacy and corruption. Literacy because, they wouldn’t know the importance of declaring their income and getting themselves registered and corruption because, if they get caught, they pay bribes to be let off the hooks. One way you can’t really blame them, because that is their only source of income and that is how they make their ends meet, they don’t have much of a choice. So basically everyone has needs, but what we are willing to do, to fulfill those needs, is what separates us from the beggars. Salary is not enough to make ends meet, as our demands keep on increasing. So what other choices do they have?
Well, there are many more ways to earn that extra income, it can be done through investments. You invest a certain sum of money in any investment instrument and give it time to grow through the interest earned, in other words, your invested capital is being appreciated, this capital appreciation is also known as capital gains. We all know, where there is income, there is tax, some investments have more advantages over the other investments. Also, the duration is one more important factor that decides,’ how much tax you pay’ and also if you have incurred a long term or short term capital gain. The longer the investment kept, the better it is for you, since you save more tax. Let us now look at how a short and long term investment is categorized:
- Short term investment in case of Equity, debt, and real estate: For equity, if the investment asset is held for less than 12 months and attracts gain, then it is considered as short term capital gain and will be taxed at a flat rate of 15% + educational cess at 4%. For debt, real estate, and physical gold, gold ETF, the short-term capital gain will arise, only if the asset is held for less than 36 months and will be taxed according to their slab rates + educational cess at 4%.
- Long term capital gain in case of Equity, debt, and real estate: For equity, if the investment is held for more than 12 months, the amount withdrawn will be tax-free in the hands of the investor up to a realized gain of 1lac and 10% tax will be levied on any gains above this threshold of 1 lac. For debt, real estate, and gold, the long term capital gain will arise, only if the asset is held for more than 36 months and will be taxed at 20% with indexation benefit + educational cess at 4%.
One more term that we need to understand before we move ahead is ‘Indexation Benefit’. What is the indexation benefit? Say Mr. Paul bought a house 5 years back for Rs. 60 lakhs, he wants to sell his house now for Rs. 1 Crore, what will be the capital gain he earns? Now, I’m sure many of you will say Rs. 40 lakhs. But that’s wrong because, in those 5 years, the value of the house has also appreciated saying Rs. 80 lakhs, so Mr. Paul has made a capital gain of only Rs. 20 Lakhs. So indexation is a technique to adjust the income payments, through a price index and the benefit is given, just to maintain the purchasing power of the people, after taking inflation into consideration.
As you can see for yourself, investing for a longer term is better than investing for a shorter term. Now let us look at the 5 categories, where you can incur long term capital gain and as we have already seen you can save maximum tax when your capital assets are long term in nature:
This is a very risky type of investment, as it has direct exposure in the market. Under equity, there are again numerous instruments in which you can invest, namely shares, mutual funds, etc. Since the risk is very high, the tax implication on equity investments is also very lenient. In fact, a person can save more tax, if they invest in equity and it could be tax-free if these investments are held for more than 12 months and the gain amount is less than 1 lac. However, there is only one equity mutual fund, which is known as Equity Linked Saving Scheme, which is available for deduction under section 80C. This fund’s lock-in period is for 3 years, as it is the only fund available for deduction.
For example, If a person has invested in 100 shares for Rs. 50000/-, he now wants to sell off those shares for Rs. 80000/-, within 6 months from the date of purchase, he has attracted short term capital gain, so now he has to pay 15% + 4% on that profit of Rs. 30000/-. Let us say he has kept it for 12 months and wants to sell it now at Rs. 100000/-, the whole amount of Rs. 50000/- will be tax-free in the investor’s hands.
This is a safer option as compared to equity funds in terms of risk, so the tax levied on debt instruments is also more as compared to equity investments. But the same logic of the holding period of the investments is applied here as well, the longer the investment held, more of your tax gets saved. Unlike equity investments, after 36 months of holding the investment, the amount withdrawn will not be tax-free, but the person will get the indexation benefit. So once the indexation benefit is deducted from the sale consideration, 20% + 4% will be levied on the remaining amount.
This is another asset, held by an individual, which can attract capital gains. If a person sells his house, the profit that he makes on the sale of his property will be taxed on, for how long he has held that property. Again if it is a short-term capital gain, it will be taxed as per the individual’s slab rate. On the other hand, if it is a long term capital gain, then tax will be charged at 20% with indexation benefit + 4% educational cess. Now, an exemption on the long term capital gains is available under section 54. But to claim this deduction, the following has to be fulfilled:
- To claim this exemption, a residential property must be bought, it could be either old or new or to be constructed.
- To claim this deduction, only two house property can be bought and it should be in the name of the seller too.
- This property has to be situated in India, this deduction available cannot be claimed for properties bought or constructed out of India.
- The seller should purchase a residential house either 1 year before the date of sale or 2 years after the date of sale. In case the seller is planning to construct a house, he will have to construct the residential house within 3 years from the date of sale.
Please keep in mind that, in the long term capital gains are not invested in a new house property, before the date of tax filing or 1 year from the date of sale, then the same amount can be deposited in a Capital Gains Account, as per the Capital Gains Account Scheme, 1988. Also note that, if the property bought is sold before the completion of 3 years, then the exemption will be reversed and now the gains acquired from the sale will be taxed as short-term capital gains. So like equity, in real estate also, there is a chance for your long-term capital gains to be tax-exempt.
This is a completely different category and the long-term gains taxed, is also different from the rest. So if these bonds or debentures are sold before the completion of 12 months, then it falls under short term capital gains and will be charged as per the individual’s slab rate. However, if it’s sold after the completion of 12 months, then it is taxed at a flat rate of 10%. So again here, you have long term gains having the upper hand.
There are different ways in which people can invest through gold. Buying gold is a common way of investing in it. It is, however, more of an asset than an investment. For gold, only after the completion of 36 months, will it be considered long term and will be taxed at 20% + 4% with indexation benefit. If it doesn’t complete 36 months, then it will be charged according to the individual’s slab rate. It is better not to hold gold physically, it is a safer option to buy paper gold. The Government has proposed that Sovereign Gold Bonds, issued by the Reserve Bank of India, will be exempt from capital gains tax which makes it one of the best ways to invest in Gold. Another exemption that has already come into force, since April 2016 is, under Gold Monetisation Scheme, the deposit certificates issued, will also be exempt from capital gains tax.
Related Article : Sovereign Gold Bonds – Should you invest?
Note: In the case of SIPs, in mutual funds, each of your SIP has to complete, the relevant months to fall into the long term capital gain category. For example, SIPs in equity mutual funds, have to complete 12 months individually to be tax-free. So if I invest Rs. 1000/- every month, starting from January 2020, then the SIP of January 2020 ONLY will complete 12 months in Jan 2021 and that amount plus the interest earned on it will be tax-free (i.e. Rs. 1000 + interest amount ). So February’s 2020 SIP will be tax-free only in February 2021 and so on. In the case of the Equity Linked Savings Scheme, each SIP will have to complete 3 years.
So it’s very clear now, that the longer you stay invested, the better it is for you. It is very easy to dream, but the hard part is putting that dream into action, you have the above options to guide you also, what are you waiting for? We all crib about how we have to pay tax for all the incomes we earn; well now we have a choice to reduce that tax payment.