Financial stability faces numerous challenges in today's world. Medical emergencies, unexpected travel, urgent home repairs, and unforeseen costs can quickly throw even the best-laid financial plans off track. Alongside this, household savings are steadily depleting, and many borrowers are turning to loans and credit just to keep up with daily expenses. This trend highlights the need for borrowers to be more mindful of how they use credit to avoid long-term financial stress.
Quick access to funds: Personal loans offer immediate liquidity, allowing borrowers to meet urgent needs without the hassle of providing collateral. This makes them an ideal solution for emergencies, such as medical expenses or sudden travel costs.
Flexible repayment terms: Most personal loans come with flexible repayment tenures ranging from 12 to 60 months. This flexibility enables borrowers to plan repayments based on their income, financial goals, and future aspirations.
Minimal documentation: The rise of digital lending has made personal loans even more accessible. With minimal documentation required, banks and financial institutions often disburse funds within hours, provided the applicant meets the eligibility criteria and maintains a good credit profile.
Borrow only what’s necessary: Personal loans, credit cards, and home loans should only be used for what you genuinely need. Avoid taking on debt for non-essential purchases or to cover lifestyle expenses.
Ensure the repayment capacity: Before taking a loan, use personal loan EMI calculators to assess whether your monthly repayments are feasible within your income. Ideally, your EMI should not exceed 30-40% of your monthly income. This ensures you are not overburdened by debt repayment.
Select regulated lending institutions: For personal loans, always choose banks or NBFCs (Non-Banking Financial Companies) that are regulated by the RBI. This will ensure you are protected from predatory terms and high-interest rates that often come with unregulated lenders.
Automate EMIs: Setting up automated payments will help ensure you never miss an EMI, thereby protecting your credit score and preventing late payment penalties. A strong credit profile is essential for future borrowing needs.
Rebuild emergency fund: Once you have navigated through a financial crisis, take the time to rebuild your savings. Consulting a certified financial advisor and working on your emergency fund can help reduce the need for loans in the future.
While personal loans can provide short-term relief, they also come with their own set of risks that borrowers must be aware of:
Personal loans are typically unsecured loans, which means they do not require collateral. As a result, they tend to have higher interest rates compared to secured loans. These higher rates can increase the overall cost of borrowing.
Failing to make timely payments on personal loans can severely damage your credit score. Missing EMIs or skipping payments can hurt your credit profile and make it harder to secure loans in the future.
Taking on multiple personal loans without a clear repayment strategy can lead to a debt trap. Borrowers may find themselves constantly juggling payments, accumulating debt faster than they can repay it.
Many personal loans come with processing fees, prepayment penalties, and other hidden charges. These additional costs can make the loan more expensive than initially anticipated.
As household savings continue to dwindle, personal loans can offer much-needed financial flexibility. However, they must be approached with caution. Borrowers should carefully evaluate their needs, repayment capacity, and loan terms before taking on personal debt. Understanding the risks and planning ahead with the help of a certified financial advisor is key to ensuring that borrowing doesn’t lead to long-term financial complications.