Avoid Personal Loans in These Situations
Have you been offered a personal loan either by your financial institution or by another financial institution? The offer may appear attractive as they provide simple disbursement. However, if you are interested in such a loan, then you must know what other things it entails. A personal loan, whether by HDB personal loan or Axis bank or Bank of India, is unsecured in nature, where banks do not take any security or collateral against any amount. Such loans can be taken up to mitigate an emergency financial requirement or for certain personal reasons.
Thus, it must be taken at the time when you are in immediate need of funds. This short-term personal loan is usually taken to restructure your unanticipated debt, but you require to be careful when opting for such loans. A personal loan is a good choice just if the amount you need is not big, and your monthly budget can simply fit in the added EMI (equated monthly instalment) expense. While there might be situations where you might have zero options but to get a personal loan, there are scenarios where such a loan is avoidable given the usually high rate of interest attached and high repayments.
Mentioned here are some situations for which you must not opt for a personal loan –
Do not avail of a loan on behalf of others.
Few of you may make the mistake of availing personal loan on behalf of your friend. If lenders are not providing you loan, then availing of a loan is not a good move. Whenever you think about availing a loan, just ask 1 major question – Is the loan a need? Just when the answer to this question is yes, you must think about availing a personal loan.
Avoid substituting for regular savings.
Most tend to overlook the basic fact that a personal loan is short-term in nature and costly. Repaying them timely becomes a massive task in many cases. It is not and must not be a substitute for regular savings. So, to the extent possible, limit its usage to emergency situations.
Repay your loan in as less time frame as possible to assist you in saving on the interest constituent. This assists in 2 major ways. Firstly, you will not be worried about accumulating debt. Secondly, you may have a fallback when you are in a financial emergency.
Do not opt for it when a particular loan is available
Do not go for a personal loan if any secured loan option is available. For instance, if you are looking to renovate your home, choose a home improvement loan and if you want to buy a car or opt for a car loan. Such secured loans have a lower rate of interest than personal loans.
Do not avail loan to make any investment.
A personal loan must not be availed for gambling and investing in stocks. Do not avail of a loan to invest in stocks or for any speculative reasons. It is nothing short of a gamble where you may lose out on the invested funds. There are nearly no quick ways of becoming rich. Building a corpus takes patience, dedication, and planning.
Do not take any loans to begin your business.
When you avail of a personal loan, it means you are committing to making regular repayments. However, in a business, there is zero assurance of cash inflows. Failure to match your estimated business income with your planned repayment schedule might land you in an extreme debt trap. In case you hold a dream of turning into an entrepreneur and want to open your own business, then you must accumulate funds via good investment instruments like making an investment in mutual funds, opting for equity stocks, or getting funded by a few good investors.
A personal loan is a kind of unsecured credit which can be utilized for any type of emergency expenditure. It is one of the popular types of credit basically because it does not need security or collateral, and there’s no limitation in terms of its end usage. You can simply use the loan proceeds to mitigate any type of expenditure.
However, you must note that personal loans are meant for emergencies, and they must not be misused. Mentioned here are certain things you must not do when it’s about a personal loan –
Submitting a lot of applications at once –
A lot of times, you tend to make several applications with distinct lenders or banks for a personal loan. The idea here is it at least one of the applications may get approved. However, it’s a myth. It is not looked upon as a healthy practice. Personal loan approval is dependent on various parameters, including your credit history, credit score and repayment capacity. Making a lot of applications at once makes it evident to the lender that you are credit hungry in nature. It may end up in all applications getting rejected, and your credit score may even take a toll.
Inability to compare all loan offers before applying –
You must always compare all the loan offers that are available to you before you apply for a loan. There are various aspects linked to a personal loan like processing fees, rate of interest, foreclosure fees and others. It’s necessary to scrutinize all of them completely before you place an application for the loan. For this, you can visit online lending marketplaces.
Not selecting a repayment tenure as per suitability –
This is one of the parameters that you must choose correctly. A personal loan is nothing but debt, and it must be used just to mitigate your immediate cash crunches. The repayment tenure offered by your lender can be as much as 5 years. However, the longer the repayment tenure more will be it is effective the interest on the loan proceeds. To avoid splurging money, it is recommended to select a repayment tenure for affordable repayment. Selecting a repayment tenure which is very short may also not be helpful as you may fall short on the cash to make EMI repayment on time. This may have a poor impact on your credit score and history.
Having a lot of personal loans at the same time –
Having various active personal loans at a particular point in time is not a wise decision. Checking each of the finance personal loan statements to make their repayments manually becomes a problem. At times, you may even tend to forget about repaying one or two of your personal loans. For instance, if you have 4 personal loans running, 2 from Axis Bank, 1 from HDB finance and 1 from HDFC bank, here you will require checking the Axis bank personal loan statements, HDB finance loan statement individually and HDFC bank personal loan statement to timely repay your personal loan EMIs. If you miss out on checking any of the statements, you hold a high possibility of missing out on its repayments. Thus, it is not a wise decision to opt for multiple personal loans at once. Also, having multiple personal loans create a negative impact on your credit score.