If you are short of funds currently and want the requirement to be met in the immediate future, what do you generally do? Raise a personal loan?
Well, it may work in certain cases, for instance, when you desperately need money for medical emergency, for renovating the house or even for the education of your child, but should you raise loan when you want to go on a vacation – this is a grey area but more often than not, you should refrain from doing so.
Here we list out some key scenarios in which you should not rely on personal loan:
1. High interest rate: When the bank is offering a personal loan at an interest rate above 15-24 per cent, it may not be a good deal. Notably, high-interest loans increase the total repayment amount, making it financially draining.
2. Lacking stable job: If your job is uncertain or you have an irregular income, taking a personal loan can be risky. Remember that missing EMIs can damage your CIBIL score and lead to penalties and legal action.
3. When you have too much debt: If your Debt-to-Income (DTI) ratio is above 40%, taking another loan can overburden you. It is vital to note that managing multiple loans (home loan, car loan, credit card debt) along with a personal loan can lead to financial stress.
4. For luxury: Personal loans for weddings, vacations, high-end gadgets, or shopping are unnecessary expenses. You end up paying much more due to interest, making these purchases more expensive.
5. To invest in the stock market or crypto: Investing borrowed money in stocks, crypto, or risky assets can lead to huge losses. If markets crash, you may lose money while still having to repay the loan with interest.
Instead, you should consider a secured loan such as a gold loan, loan against FD or PPF for a lower rate.
(Note: Raising a loan comes with its own risks. So, due caution is advised)