Due to easy availability of personal loans in recent times, the proportion of loans disbursed to those with income below Rs 3 lakh has grown in the last three years. Between April 2020 and now, 67 percent of the personal loans has been given to this segment of borrowers, as opposed to 69 percent in 2019-20 and 63 percent in 2018-19, as per a CreditScape report put out by CRIF High Mark.
They are young, as well. The study also shows that 51 percent of the borrowers of personal loans between April 2020 and now are under the age of 35. This level has consistently been the same in the last three years.
Applying for a personal loan is now an easy and quick process in India. If you have a good credit score and clean repayment history, you get a personal loan in a matter of hours from banks, new-age fintech lenders and non-banking finance companies (NBFCs). Banks and fintechs extend ‘pre-approved’ credit line (personal loan) to borrowers and you get the money transferred to your bank account simply by clicking a few buttons on your mobile.
Just because personal loans are available easily, you shouldn’t borrow at the drop of a hat.
Is a personal loan your first or last option?
Experts say that applying for a personal loan should be your last resort. If you are in a tight financial situation, first try and tap your emergency corpus if you have one. If you don’t, then liquidate your existing investments, including gold.
Review your investment portfolio carefully. Too many dud traditional insurance policies that you don’t need should be surrendered. Consistently underperforming mutual funds or a portfolio with too many liquid fund investments with low balances in each can be liquidated. This may built a sufficient corpus in this situation to avoid applying for a personal loan.
Taking on an additional personal loan to pay off your existing loan or credit card dues can lead to a financial disaster, especially in these pandemic times of salary cuts and job losses.
Raj Khosla, founder and MD of MyMoneyMantra.com says, “At this time, be frugal and control your expenses. Only if it’s a dire emergency should you apply for a personal loan.”
Borrow only what you can repay
It’s natural for low-income earners to borrow, as the CRIF report shows. But a low income also means that you will be under increased pressure to pay your equated monthly installments (EMIs) on time. If you must borrow, then ideally what must be the amount?
Experts say that your EMIs should not exceed 40 percent of your take-home pay. And this should include all types of borrowings, including other types of loans you may have: home, vehicle, education and so on. Your personal EMIs would anyway be higher proportionately because personal loans come with high interest costs – around 16-18 percent.
“Don’t borrow more than what you can afford. Your personal loan EMIs should not account for more than 10 per cent of your net monthly income,” says Khosla. Your monthly outgo towards all loans should not be more than 50 per cent of your monthly income.
Also read: SBI report on rising online credit card usage: How to avoid a debt trap
Do not borrow recklessly
Personal loans disbursed under Rs 5,000 have almost doubled in the last three years, as per the CRIF report (refer to graphic). Clearly, people have been borrowing for small causes.
“These firms have been increasingly targeting millennials, low-income, digitally-savvy customers who have small-ticket and short-term credit needs, and no or limited credit history — customers who are generally avoided by the incumbents because of their high perceived risk," says Navin Chandani, MD & CEO, CRIF High Mark.
“We have seen borrowers taking multiple loans for specific needs such as travel, lavish marriage and so on,” Sathya Kalyanasundaram, Country Head and Managing Director, Experian India had said in an earlier interview to Moneycontrol. With multiple personal loans and limited income growth, millennials end up in a debt trap.
Here’s what you need to remember. Personal loans are expensive. If you fail to pay even a single EMI on time, your credit score gets impacted. And this affects pact your credit history for any future borrowing, even if that’s more crucial than your current loan. Parijat Garg, a credit scoring expert says, “Until the defaulting or delinquent borrower settles the overdue amount, it will be difficult to get new credit from formal financial institutions. And even if one does manage to secure another loan, it’ll be quite costly due to a poor existing credit score.”