Why taking a personal loan isn’t always a smart move
Personal loans are often seen as easy solutions for pressing financial needs, like medical bills or vacations abroad, but while may be a convenient way of getting cash quickly, the high interest rates and harsh repayment plans make them a less-than-ideal solution
Loans aren’t always the answer: When you’re faced with an emergency like sudden medical expenses, weddings, or big-ticket purchases, it is easy to apply for a personal loan to tide you over. You get quick access to funds with quite little effort. But just because they’re easy to get doesn’t mean you should. Before taking a loan, it’s important to consider a few things: for example, is the interest rate sustainable for you over a long term? What about the short repayment plan? Do you know the hidden charges? Not knowing the answer to these questions can quickly turn an easy solution into a long-term financial burden.
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For non-essential or impulsive purchases: If you are using a personal loan to finance your social life and lifestyle, you need to take a step back to reconsider whether you really need to upgrade to the latest phone, or go on a luxury holiday, or throw a big party. These momentary expenses will leave you saddled with long-term loan repayments. Additionally, the interest on the loan will be far more than the actual value of the purchase over time. So, think before you put in your application: can I delay, save for, or do without this purchase?
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When you already have high debt: Consider your current debt situation—credit card dues, EMIs, or other outstanding loans add up and will make another personal loan a burden on your already tender finances. Not only will your monthly obligations increase, you will also have little room for savings or emergencies. Besides, lenders will look at your debt-to-income ratio when you apply for loan. Your monthly debt should not be more than your income, and if it is, a new loan may be harder to get, come at a higher interest rate, or trap you in a cycle of borrowing to repay existing debt.
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To invest in risky or speculative ventures: Getting a personal loan in order to invest in stocks, crypto, or to start a new business that does not yet have stable returns is a bad idea. These investments are high risk, and you will be saddled with loan repayment even if you lose the money. Personal loans carry higher interest rates than business or education loans, and are not suitable for unsecure circumstances. It may be better to explore targeted loan products or bootstrap investments until you’re more financially stable.
When your income is unstable: For those in a contractual job, or with a business where revenue in unpredictable, or if you’re facing delays in getting your salary, a personal loan may not be the best option to tide you over. No matter your financial circumstances, you will need to pay the EMIs on time as missing them will result in hefty fees and a damage to your credit score. Borrowing money when your income is inconsistent and when you’re unsure of the future can lead to default and financial stress. Only borrow when you’re confident about stable repayment.
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Borrow only with a plan: A personal loan can be helpful when you use them wisely—for instance, if you have a medical emergency, or need to do home repairs, or are consolidating high-interest debt. But it’s best not to use them to substitute your income or upgrade to a better lifestyle. Always consider whether you really need the loan and whether you will be able to repay it comfortably. If you can’t, it’s better to wait, save, or explore other funding options.
