Taking a personal loan has become incredibly easy these days. Banks and finance companies offer attractive offers to customers, promising instant loans. Salaried individuals, in particular, often receive pre-approved personal loan offers. In some cases, funds are transferred to their account within minutes using a mobile app or internet banking. However, as convenient as this convenience may seem, it also comes with a significant amount of responsibility, as personal loans typically carry the highest interest rates. Customers with a good credit history can earn around 9.99 percent annual interest, while for riskier customers, the rate can be as high as 20 percent or more.
What is a Personal Loan?
A personal loan is an unsecured loan, meaning you don’t need to provide any collateral or collateral. This poses a higher risk for the bank, and this is why its interest rate is higher than that of other loans like home loans or car loans. Banks determine interest rates based on your income, job stability, and credit score.
When to Take a Personal Loan
If a medical emergency arises and you don’t have immediate funds, a personal loan can prove helpful. Similarly, this option can be useful for essential home repairs, such as a leaking roof or structural issues. Furthermore, if you need immediate funds for an urgent project and are able to pay regular EMIs, a personal loan is a good option. However, in such cases, it’s best to opt for a loan with a lower interest rate.
The Impact of Choosing a Longer Loan
If you take out a personal loan for a longer term, your monthly EMIs may be lower, reducing pressure on your monthly budget. However, a longer loan term significantly increases the total interest payment. Therefore, you should always choose a term based on the total repayment amount.
When to Avoid Taking a Personal Loan
If the expense is not essential and is solely related to lifestyle or desires, you should avoid taking a personal loan. Many people take out personal loans to purchase gadgets, travel, or go shopping, which can increase financial pressure in the long run. Furthermore, personal loans come with processing fees, documentation charges, and prepayment penalties, further increasing the cost of the loan. Interest rates can be quite high if you have a low credit score.
Why an Emergency Fund is Important
Financial experts always recommend that everyone build an emergency fund based on their income. This fund helps meet unexpected expenses and prevents expensive debt. Having an emergency fund significantly reduces the need for a personal loan.
What to Consider Before Taking a Personal Loan
Before taking out a loan, it’s important to carefully review the interest rate, total repayment, processing fees, and other terms. Also, assess your EMI capacity to avoid future financial stress.