Personal loans are popular because they are easy to avail, the lender doesn't monitor the usage and doesn't ask for a collateral. But don't take a loan just because you can. Before you borrow, consider how the repayment will affect your finances.
Here are a few questions a potential borrower must ask himself before he applies for a loan.
Is it really necessary to buy now?
We may feel a compelling need to buy something but the purchase may not be necessary. Using credit cards for small transactions like daily purchases, casual shopping and dining out is fine. Customers can also earn reward points against such purchases, and the outstanding can be easily paid in full before the due date. Don't be tempted to use your credit card to buy something you can't afford. These unnecessary purchases can wait until you have saved up the money to buy the item with a debit card.
Can I afford the EMI?
This is a crucial question that demands an honest response. Personal loans have a rigid repayment schedule. If a borrower is unsure of his ability to service the EMI, he should rethink his decision to take a loan.
Should I borrow for a vacation?
You may be in desperate need for a break, but go for it only if you have enough cash to meet the expenses. Taking a loan for funding your holiday isn't the answer. Vacations give you a chance to relax and not complicate your life. Unless you're in a position to pay off a loan immediately after your return, think twice taking a loan.
When to take personal loans?
Personal loans are best for larger exapenditures, of Rs 1 lakh or more, or for consolidating all smaller credit card debts. These are unsecured loans offered by bankers to fund expenses like educational fees, medical treatment bills, home improvement, etc. One should determine the repayment tenure of the loan because they are suitable for a longer tenure of more than a year and can extend up to 2 to 3 years.
What happens if I can't pay it off?
Before seeking any sort of loan, consider the long-term effects. What if you are to be out of a job in the future? This means that you will have to face extra pressure to find a new job quickly, because any late payments or skipped payments will impinge on your credit score. Moreover, you may have a difficult time finding a job if you have a poor credit history.
To pay interest on something that will most likely turn out to be of low value later is a bad idea. Steer clear of lousy investments. Taking loans for unintelligent reasons or luxuries, helping a friend without a written contract etc, is a clear path to a financial crisis. The next time you have to spend, choose wisely and refrain from seeking a loan just because you can.