Skip to main content

Why you should stay away from personal loans?

It is not uncommon to see people taking personal loans. It is also not uncommon to see banks & NBFCs pushing for personal loan. For the users, personal loans provide immediate cash to fulfill their requirements - e.g. funding a wedding, vacation, house construction or repairs, buying furniture, unforeseen medical emergency and so on. For banks, it provide a great way to increase profits, since the interest rate is usually higher, given the relative insecure nature of personal loans.

 If you are a regular user of personal loan, then all may not be well. Personal loans come with its own set of problems, and are something one should ideally be staying away from it. Bankers may however disagree, and may sell you the idea of fulfilling your dreams using a personal loan and so on. But then, they make money out of it!

 Here are few reasons why you should be avoiding personal loans.

 Why you should stay away from personal loans?

 High interest rate
The rate of interest in personal loans is usually higher than other common type of loans like home loans or car loans.  Currently most of the personal loans will carry upwards of 10% interest rate. This interest rate increases with a customer's risk profile & credit rating (e.g. CIBIlL Score). And someone telling you - "Sir, take personal loan at 11% & keep your savings in equity markets which will give > 15% assured returns" is either lying or overselling, or both.

 Hidden costs like processing fees
Most personal loans have a associated processing fees. Given the nature of personal loan, wherein loan amount is not huge, this may be a decent chunk of the loan amount, maybe 1-2% of the loan amount. This is often not factored while calculating rate of interest & expected outflow.

 Over-stretching your financial limits
Personal loans usually have a shorter duration for repayment, usually to the tune of 2-3 years and this can put severe pressure on your monthly cash outflows for the repayment period. And the fact that you have taken a personal loan is probably an indication of you unable to manage your regular expenses within your source(s) of income and hence this puts an additional pressure. Paying the loan off and getting rid of it may require some serious financial discipline.

 Long term financial planning
Having taken a personal loan indicates that you probably don't have much savings & investments and will be able to invest only once the loan has been reaped.  This sets you back by few years in your investment journey. You also lose out on the power of compounding & make compounding work against you. (but in favor of the bank or financial institution which gave you loan). In long run,  you may be risking not just your financial Independence but even basic savings.

 Symptomatic of bigger issue
You having taken a personal loan is, in all likelihood,  symptomatic of a larger issue - that you are unable to manage your finances, don't have much buffer amount and investments which can be encashed if need be. The question you need to answer is - what led you to this? Whether it is low income, high expenses, luxurious lifestyle, splurging on dining out too often, splurging too much on fashion & luxury - there can be many factors. Unless the root cause is address, things may keep repeating themselves and you may be unable to get out of the personal loan cycle.

 So, if you are considering taking a personal loan in future, rethink on why you need to take personal loan. And what were the circumstances that led you to that. In some cases, these circumstances may be beyond your control. In most, it may be because of something that you didn't do correctly. And if not addressed, before soon, you may find yourself in this unending cycle of personal loans.
__
You may also want to read - The story behind credit card debts & personal loans.

You can also read this on BeingFinWise

Comments

Post a Comment

Shop @ Amazon

Popular posts from this blog

All for a Car

"Boss, I want a car" "What? "Yes. I want a car" The boss thought for a moment. Ravi was asking for a car. Maybe he needed one. He could give him one for an hour or so. The boss was the owner of the agency, which dealt in dealing with distribution of FMCG products of a big company and was a person who had a soft corner for his employees, something which is rare in such type of work. Ravi was a small time computer operator earning Rs 5000 a month at the agency. The job involved sitting in front of a computer in an air conditioned room and punching orders and preparing the bills on the company software. But the demand for a car was a bit shocking. No employee ever asked him for a car. "Why do you need a car?" "Boss. I am getting married" "Good. Congratulations" "Thank you boss." "So do you ..." "Sir, I have told my to be father in law that I earn 35000 a month and have my own car. I'll be engaged soon. He ...
6 comments
Read more

Child Labor

He was 10 years old. When asked he said that he was 15 years old. He didn’t know why. It was just that his master told him to do so. His name was Raju. When he was born, he was named as Shivkumar, but that name did not suit his master. So his name was changed. His master owned a small juice shop in some big institute, with around 500 people. Most of these students were his customers. They visited him regularly for juice, cold drinks, eatables, cigarettes etc. This was a popular hangout, chiefly because of large credit extended by Sharmaji Raju had 3 other siblings -Two sisters of age 13 and 11 respectively and a brother of 7 years. The eldest sister worked in a small carpet making unit. She has been employed since 3 years and worked for 12 hours a day without taking and day off. Probably, in a year or two she will be married to someone from a nearby village. Probably her family would get few thousand rupees in bargain! The younger sister was employed full time with a sort of well to ...
6 comments
Read more

The Detour

The 7 year old girl walked from school to her home. This was the first time she was walking alone on that route. On any other day, her mother would have gone to pick her up from school, but not that day. She was not aware that schools were declaring holiday an hour and a half earlier due to trouble in the town owing to some agitations and protests. Only few parents could be intimated about this. A friend’s mother accompanied her to the lane leading to her apartment, from where it was just a minute’s walk. But that day, for some unknown reason she decided to roam about a bit and take the longer route. It is not always that she gets to roam about, and no one would know about it. After all she wouldn’t tell her mamma about that. The road was almost deserted. It was usually the case around the noon time in this part of the country. She walked ahead leisurely, singing and dancing all along as if she owned the road. But this was short lived. In couple of minutes, the scene changed....
7 comments
Read more

Survival

Dark clouds were looming at the horizon. In few minutes they would have traveled few miles in westward direction and came closer. This is not usually the scene at noon in the hottest month of the year. Dark clouds meant something ominous. Probably sign of an impending storm or maybe a cyclone approaching. Sea is a capricious lady. Bay of Bengal was no different. It was infamous for cyclones, and Orissa was often at the receiving end of nature’s fury. Ramdas was few miles into the sea. So were his brethrens of the fishermen community. There were around a hundred boats in the sea that day. No one anticipated the storm. So no one even thought of staying back at the shore and miss out on their livelihood of the day. Ramdas was alone in his boat. He owned the boat. His son helped him with his job. They managed to get enough as to earn a square meal a day. They had a good rapport with others of fishing community. But of late that relationship was breaking down. No reasons for that. Nor wa...
8 comments
Read more

The Forest

The Toyota Qualis and the Chvrolet Tavera stopped after a long journey. It was almost 9 in the night and it was pitch-dark. Night times in a forest are always pitch-dark. Adding to that it was a good `thirteen days since the last full moon day. Adding to this, the cloudy weather made visibility close to zero. Later in the night the forest would be engulfed in a fog making it nearly impossible to see. The only noise audible was that of silence, few random insects and that of a train going at a distance. After a long journey they all were quite weary and all they wanted was some rest so that the next day morning they can head for tiger and rhino spotting among many other species of flora and fauna in the wildlife sanctuary. Right now it was time for some parathas, maggi and booze. All fifteen of them headed for the cottage which they had booked, sat near the fire place relishing food, chit chatting about college life, universe and everything. But chit chatting wasn’t what they came ...
10 comments
Read more