Are you conscious about power of personal loans?

Sajjad Bazaz
Living on a bank loan or more precisely on equated monthly installments (EMIs) has become a norm today for almost all families if not every individual. The kind of fast growing consumerism coupled with an emerging sea of personal needs has forced almost all segments of populations, especially the young generation to live their life on a bank loan. In other words, loans have now been shaping the way of life to realize growing aspirations as everything is available on EMI. Now people think EMI, eat EMI and breathe EMI.
However, when you think about getting a loan, it is important to look at the situation, both from the bank’s perspective and your present and future financial strength. To the bank, loans are a major source of revenue as they charge interest on the money given to you as a loan. So, these loans, for whatever purpose, are not given in charity by the banks. It’s an asset for the banks and,remember, a liability for you. If you as a borrower fail to repay the loan in the given period of time, it can turn into a major financial liability as well as reputational risk for you.
Precisely, while boarding on a loan platform you should ensure that your borrowing is prudent and need based. You should not err into borrowing just because loans are easily available. Too much borrowing can leave you in difficulty in repaying a loan. It’s important for you to consider your income before raising a loan. Never go beyond your repayment capacity. Normally, 35 percent of income going to EMIs is considered reasonably good in financial planning.
Even as there are different loan schemes for different segments of people in place, a few queries from some acquaintances about personal loan makes sense to present the scheme in the right perspective so that borrowers make productive use of the funds. However, let’s first understand features of the scheme.
Personal loan is a cash loan facility with minimum documentation. The banks give this loan against your future income and the funds are instantly credited to your savings bank account.
Any person having a regular monthly income is eligible to take the route of this loan scheme. Different banks have different parameters for the scheme. Mostly, the banks prefer to extend this kind of loan facility to salaried persons falling in the age group of 21 to 60 years. For those associated with business, the age limit is extended up to 70 years.
Over a period of time, these personal loans have become the most popular means of raising funds as banks and financial institutions have allowed hassle free access to this loan segment. These loans have particularly become permanent companions of those in the middle-class segment as they take the route of this facility to manage their urgent financial needs – be it medical bills, education costs, housing needs, wedding expenses, business needs etc. The facility serves as an ideal solution when urgent financial requirements exceed available funds.
Before looking at personal loan as an option to meet urgent needs, one should look at the cost of the loan. Here it’s important to know the rate of interest charged by the banks. Interest rate varies from bank to bank. Today, in a scenario when banks rate their borrowers on the basis of credit score, you with a good credit score, can negotiate for a low interest rate. So, don’t be surprised to find a bank charging different borrowers with different rates of interest in a single loan scheme. Tenure of loan also affects the cost of loan. Personal loans are to be repaid in equated monthly installments (EMIs). Your EMI depends on your principal loan amount, rate of interest and loan tenure. These loans are to be repaid usually within 5 to 10 years. But remember, the shorter the repayment period of a personal loan, the better it is.
Now let me take up the first query raised by an acquaintance, a government servant by profession. Is it advisable to invest funds raised through personal loan in business? He asked.
Personal loan can be used for an array of purposes which include, but not limited to, emergencies, higher education, business, wedding, home renovation etc. In fact, the borrower is not asked for the purpose of the loan. This means, personal loans can also be used for business purposes as well. However, it is highly advisable to opt for a personal loan for business when you have a high credit score and can easily avail it at a low-interest rate. There are certain circumstances when raising personal loans for business is a good idea. It is easier and faster to obtain and the bank won’t check your business history. There is no need to hypothecate your stocks in the business and you can use the loan for any business-related purpose.
Meanwhile, there are certain situations such as higher rate of interest, low quantum of loan amounts etc. wherein it is definitely not a good idea to opt for a personal loan to invest it in business.
Another query is about availability of tax benefits on personal loans. One of my acquaintances was refused tax rebate when he produced a certificate from the bank showing an interest amount paid by him on a personal loan. Do personal loans provide tax benefits? he asked.
Technically speaking, personal loans generally do not outrightly provide tax benefits. However, if you use it for home construction, purchase or renovation, you can claim deductions on the interest paid. Similarly, you can get tax benefits on the interest paid on personal loans used for meeting education expenses. You can also get deductions for interest paid on personal loans used for business purposes.
To be precise, it is the use of the loan proceeds that comes into play to get tax advantages.
Here a report published in mint quoting a Chartered Accountant is self explanatory. It states:
Under ‘Section 80C of the Income Tax (IT) Act’, the principal repayment of a personal loan taken for the purchase or construction of a residential house is eligible for a deduction from taxable income. You can claim a deduction of up to Rs. 1.5 lakh in a financial year. The interest paid on a personal loan taken for the purchase or construction of a residential house is also eligible for a deduction from taxable income of up to Rs.2 lakh under ‘Section 24(b) of the IT Act’. But to claim the deduction, the property must be self-occupied. However, the entire interest paid on the loan qualifies for tax deduction if the property is let out for rent. “If (personal loan is) used for buying, building, or renovating a home, interest paid is deductible.”
Notably, borrowers can claim deduction only if they opt for the old scheme under IT. Similarly, personal loans taken for home renovation or repairs are eligible for a tax deduction as per ‘Section 24(b) of the IT Act’. In all cases, you should own the property to claim the deductions. If a personal loan is taken for meeting the higher education expenses for self, spouse, or children, the entire interest paid can be claimed as a deduction under ‘Section 80E of the IT Act’.
Notably, to claim the deductions, borrowers have to provide documents that show that they have used the loan for the specified purpose. Remember, no tax benefits apply if the personal loan is used for personal expenses like travel, wedding, car loans or medical emergencies.

(The author is Editor-in-Chief, Straight Talk Communications. He is former Head of Corporate Communications & CSR Department and Internal Communication & Knowledge Management Department, J&K Bank)