Personal loans grew 12.3 percent year-on-year in February 2022, according to data from the Reserve Bank of India, indicating robust growth in demand in this category. The personal loans category also expanded strongly, growing 12.3 per cent in February 2022 to Rs 33,06,650 crore (outstanding) on 25 February 2022 versus Rs 29,44,789 crore (outstanding) on 26 February 2021, mainly driven by long-lived ones consumer goods.
Experts say the surge in the personal loan segment is due to a resurgence in demand after a lull during the pandemic.
RBI data also showed that fixed deposit advances growth rose 26.1 percent on an annualized basis in February 2022, while growth in advances to individuals against stocks and bonds rose 20.4 percent over the same period. Loans against gold jewelry and other personal loans grew 26.2 percent and 21.5 percent on an annual basis in February 2022, respectively. However, educational loans recorded negative growth of 2.2 percent annually in February 2022.
Experts say personal loans for consumer durables are highest because of the high margins on such loans. Sitting on excess cash, a number of banks and shadow lenders are keen to lend to purchase consumer durables.
Consumers are also looking to benefit from a plethora of retail personal loans – signs of improving consumer sentiment and the labor market as lockdown eases and immunization picks up steam.
Anant Ladha, founder of Invest Aaj For Kal, a financial planning firm, says: “After the pandemic subsided somewhat, companies have aggressively pushed for long-lived consumer purchases through personal loans as there is a high margin. But now is the time for consumers to be careful and educate themselves.”
Experts advise consumers not to take out personal loans for the purchase of durable consumer goods. That’s because a consumer durable isn’t an asset, it’s something that depreciates in value over a short period of time. Also, it doesn’t have a high resale value. Therefore, taking out a high-interest personal loan for such a purchase does not seem expedient in the long run.
Here are a few other options you might consider instead to fund your consumer durables purchase:
Delay the purchase or use cash: The best option is to buy in cash from the available balance that is available to you. If you don’t have cash on hand, treat it as a short-term goal and start saving for it. Don’t let your desperation to buy interfere with your financial life by incurring unnecessary debt. “Personal loans for consumer durables are the worst decision. There are two reasons – high interest rate and no income tax benefit. Instead, it would be wise to save and use that money to buy consumer durables. And even a delayed reward is absolutely fine, and you could postpone your purchase rather than ruining your finances in the long run,” adds Ladha.
Buy now pay later card: The second option could be to use a BNPL (buy now pay later) card to ensure you pay back the amount on time with no interest charged. BNPL cards usually have an interest-free repayment window. Remember to repay the amount on time to avoid interest and penalties.
Permanent Consumer Loans: Consumer durables loans are available in the market specifically for the purchase of consumer durables. These are loans offered at low or no interest rates by financial services companies such as Tata Capital, HDFC, Capital First to name a few. The ideal way to choose the right option is to opt for a loan option that covers most durable household products at a low interest rate, low down payment and longer term.
It’s true that bringing home a durable consumer product makes you feel happy. However, care must be taken that we do not sacrifice our long-term financial well-being for the sake of short-term happiness.