While personal loans are being made easily accessible in India, they are a solution in waiting for money to fulfill all possible needs, be it a health issue or weddings. Their easy availability might be concealing some serious threats. Five things worth considering before availing a personal loan are listed below:
Personal loans can come with high interest rates
Personal loans can come with high interest rates, typically between 10% and 24%, depending on your credit score and the policies of your bank. To put it into perspective, an ₹5 lakh loan at 15% interest for a period of five years might cost you nearly ₹7.12 lakh in total as a repayment amount. This is much more than the original principal.
Borrowers should carefully compute the repayment sum, including embedded charges such as prepayment fees and processing fees, prior to signing on the loan agreement document.
Don’t borrow more than you can afford
One of the most common mistakes is taking loans that are out of your repayment capacity without clearly understanding the hidden charges. Over-borrowing causes financial pressure, driving borrowers to debt traps and financial stress.
Reserve Bank of India (RBI) cautioned against aggressive personal loan growth, highlighting the risk of defaults which can destabilise individual balance sheets and the overall economy.
Be careful of indiscriminate online loans
The emergence of lending websites has made loans with minimal documentation easy. Such loans are costly, carry hazy terms, high interest rates and have a short repayment period. For instance, a ₹20,000 loan at 35% per annum interest for half a year can translate to a total outgo of ₹27,000. That is why always read small print carefully and compare rates before going for a particular loan offer.
Protect yourself with a good credit score
Every new credit card or personal loan application results in a hard inquiry on your credit record, decreasing your score temporarily. Default or late payment will damage your creditworthiness in the long run, and borrowing in the future will cost you much higher or won’t be possible at all. Therefore, you must pay timely to safeguard your financial health, credit score and integrity.
Save for emergencies without loans
Money experts tell you to maintain an emergency fund instead of borrowing for unexpected requirements. As said by Benjamin Franklin, “An investment in knowledge pays the best interest.” Money education will save you from unwanted debt traps. In case of uncertainty, always take advice from experts of financial markets and SEBI-registered investment advisors.
Hence, in brief, personal loans can prove to be a lifeline in the event of emergency, but nevertheless must be employed prudently. By evaluating your monetary position, long-term goals and weighing choices like: employer loan, leading financial institution for a loan along with lower cost credit facilities etc., can all help you arrive at well-planned decisions and avoid a trap of debt.
(Disclaimer: Raising a loan comes with its dangers. So due caution is advised.)
