Why You Shouldn’t Finance Your Consumer Durables With Personal Loan

Personal loans increased by 12.3 per cent on a year-on-year (y-o-y) basis in February 2022, according to data from the Reserve Bank of India, thus indicating a robust rise in demand in the category. The personal loans category also expanded at a strong rate and grew by 12.3 per cent in February 2022 at Rs 33,06,650 crore (outstanding) as on February 25, 2022 as against Rs 29,44,789 crore (outstanding) as on February 26, 2021, driven mainly by consumer durables. 

Experts say, the jump in personal loans segment is due to the revival in demand after a period of lull during the pandemic.

The RBI data also revealed that the growth in advances against fixed deposits grew by 26.1 per cent in February 2022 on a yearly basis, while growth in advances to individuals against shares and bonds grew by 20.4 per cent in the same period. Loan against gold jewellery and other personal loans grew by 26.2 per cent and 21.5 per cent in February 2022 on a yearly basis, respectively. However, education loan saw a negative growth by 2.2 per cent annually in February 2022.

Experts say personal loan for consumer durables is the highest due to high margins in such kinds of loans. A number of banks and shadow lenders sitting on excess cash are eager to dole out loans for consumer durables purchases. 

Consumers, too, want to take advantage of a plethora of personal loans in the retail segment – signs of an improving consumer sentiment and labour market, as lockdowns ease and vaccinations gather pace.
 
Says Anant Ladha, founder, Invest Aaj For Kal, a financial planning firm: “After the pandemic subsided a little, the companies have been pushing aggressively for consumer durable purchases through personal loans, as there is a high margin. But now, it is time for consumers to be cautious and educate themselves.” 

Experts advise consumers not to take personal loans to purchase consumer durables. That’s because a consumer durable is not an asset, but something that depreciates in value over a short period of time. Also, it does not have a high resale value. Hence, taking a personal loan at a high rate of interest for such a purchase does not seem to be beneficial in the long term. 

Here are a few other options you could instead consider to fund your consumer durables purchase:

Delay the purchase or use cash: The best option is to buy in cash, from the available balance at your disposal. If you do not have available cash, treat it as a short-term goal and start saving towards it. Do not let your desperation to buy something affect your financial life by taking unnecessary debt. “Personal loans for consumer durables is the worst decision. There are dual reasons – high interest rate and no income tax benefit. It would be wise instead to save up and use that fund to purchase your consumer durables. And even a delayed gratification is absolutely fine, and you could postpone your purchase, rather than ruining your finances in the long term,” adds Ladha. 

Buy now pay later card: The second option could be to use a ‘buy now pay later’ (BNPL) card to ensure you pay back the amount on time without any interest charge. BNPL cards usually have a window for interest-free repayment. Remember to repay the amount in time to avoid the interest and penalty charge. 

Consumer durable loans: There are consumer durable loans available in the market specifically for buying consumer durables. These are loans offered by financial services companies, such as Tata Capital, HDFC, Capital First, to name a few, at low or nil interest. The ideal way to choose the right option is to go for a loan option that covers most of the household durable products for a low interest fee, low down payment, and a longer tenure.

It is true that bringing a consumer durable product home certainly makes one feel happy. That said, one must be careful to ensure that for the sake of short-term happiness, we do not derail our long-term financial wellbeing.