When Sunil’s daughter’s wedding expenses ran higher than planned, a bank representative called him with an offer: “Sir, ₹5 lakh personal loan, sirf 10 minute mein approve, koi collateral nahi chahiye.” It sounded like a lifesaver. What the representative didn’t emphasize as clearly was the interest rate — nearly 14% per year, much higher than a home loan or even most other loans.

Two years later, Sunil was still paying EMIs on a wedding that had already happened, wondering if there was a better way he could have handled it.

What is a personal loan?

A personal loan is money you borrow from a bank or lender for any personal purpose — a wedding, medical expense, travel, or simply covering a shortfall — without needing to pledge any asset (like a house or gold) as security. Because the lender takes on more risk (nothing to seize if you don’t repay), personal loans usually carry much higher interest rates than secured loans like home loans or loans against gold.

Why personal loans are so easy to get?

Since no collateral is needed, and approval is largely based on your income and CIBIL score, personal loans can often be approved within minutes through an app or bank website. This convenience is exactly why they’re so easy to take without fully thinking through the cost — banks make significant profit from the high interest charged on them.

When a personal loan can make sense?

  • A genuine medical emergency, where you need funds immediately and don’t have time to arrange anything else
  • Paying off a very high-interest debt (like credit card debt) with a personal loan carrying a lower interest rate — this can actually save money (Read our Credit Card Debt guide — Jun 15)
  • A short-term cash flow gap that you’re confident you can repay quickly, without extending it into years of EMIs

When to avoid a personal loan?

  • For discretionary spending like a vacation, an expensive gadget, or lifestyle upgrades — these can usually wait until you’ve saved for them
  • For a wedding or celebration that could be scaled down instead — going into years of debt for a single day’s event often isn’t worth the long-term financial stress
  • If you’re already struggling with other EMIs — adding a personal loan on top increases the risk of falling into a debt spiral

What Sunil could have done differently?

Looking back, Sunil realised he could have scaled the wedding down slightly, used a smaller amount from his existing savings, and taken a much smaller personal loan (or none at all) — avoiding two years of high-interest payments for a single event.

Key Takeaways

  • Personal loans don’t require collateral, but carry much higher interest rates as a result
  • Easy approval makes them tempting to take without fully considering the cost
  • They can make sense for emergencies or replacing higher-interest debt
  • Avoid them for discretionary spending, celebrations, or when you’re already managing other EMIs
  • Always compare the interest rate to what you’re actually solving before taking one

FAQ

Q: What interest rate should I expect on a personal loan?
A: Typically 10-24% per year, depending on your CIBIL score, income, and lender — always compare multiple lenders before choosing.

Q: Is it better to use savings or take a personal loan?
A: Using savings avoids interest entirely. A personal loan should only be considered when you don’t have sufficient savings and the need is genuinely urgent.

Q: Can a personal loan affect my CIBIL score?
A: Yes — timely repayment helps build your score, while missed payments can hurt it significantly, just like any other loan or credit card.

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— DhanMaitri Desk
Simple financial wisdom for every Indian