3 Scenarios Where You Should Be Very Cautious To Take a Personal Loan

© Provided by BankBazaar.com Photo: www.freepik.com A loan, when managed smartly, could not just help accomplish our critical life goals but also bail us out of a financial emergency. There are many types of loans available in the market to suit different requirements, which can largely be classified into two […]



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© Provided by BankBazaar.com
Photo: www.freepik.com

A loan, when managed smartly, could not just help accomplish our critical life goals but also bail us out of a financial emergency. There are many types of loans available in the market to suit different requirements, which can largely be classified into two categories: secured loans and unsecured loans. A secured loan, which can be obtained after pledging the necessary security like gold, property, eligible investments and insurance plans, could be cheaper than an unsecured loan. However, the lender reserves the right to liquidate the pledged security to recover its dues if the borrower fails to timely repay a secured loan. But on many occasions, borrowers’ lending requirements are above the value of their securities, they don’t possess or don’t want to pledge the necessary security or they look for open-ended financing facilities, and hence, prefer unsecured loans like a personal loan. In fact, a good credit score and a stable income could translate to personal loan offers at competitive rates that can be availed of quickly, especially if they are pre-approved. 

That being said, borrowers need to be extremely cautious in deciding whether their requirement warrants for a loan or not. They should also compare different financing facilities and different offers within their chosen loan product to find the best match to their financing requirements. They should also avoid things like over-borrowing, borrowing without any specific requirement or borrowing more than their repayment capacity. Repaying any kind of loan is a legal and moral obligation that must be met to avoid the accumulation of debt, loss of a precious asset and an impacted credit score.  

Any kind of loan should ideally be used to increase the value of an appreciating asset, to meet financial goals or to tackle an emergency. However, there are a few scenarios where it doesn’t make a lot of financial sense to take a personal loan. In this article, we take a look at a few such situations where you should be very cautious to take a personal loan.  

For Investing in the Stock Market

Personal loans are currently being offered at interest rates in the range of 8.9%-24% p.a for salaried individuals. However, when you take a personal loan to invest in stock markets, the returns should ideally be higher to match up the repayment amount, including the interest rate. Volatility in stock markets may not guarantee stable or higher returns regularly. Given the higher interest rate levied on a personal loan, you should also keep in mind that the EMI amount may affect your monthly budget and exert pressure on your pocket. A seasoned investor with good knowledge about the markets may still take the risk of taking a personal loan for stock market investments. But it may prove risky for investors who do not understand both the markets and features of a personal loan. Ideally, if you are keen on taking a personal loan, you should have a repayment plan in place, in case you face a loss.  

Taking A Loan On Behalf Of Another Person 

When you borrow from a financial institution, you enter a loan agreement, where you give a repayment plan to the lender for the borrowed money. Taking a loan on behalf of another person would still mean the same that the loan agreement is between you and the lender. The arrangement to take a loan is between you and the other person, which doesn’t bother the lender anyway. So in the event of a default, the lender would hold you accountable and not the other person for whom you took the loan. In fact, there might be a reason why the person on behalf of whom you took a loan couldn’t get his loan application approved. And, in all probability, it could be because that person is not regarded as creditworthy by the lenders, precisely why you too shouldn’t take a loan on his behalf. 

For Covering your Cost of Living

One major hint to all lenders that you are facing a serious financial crisis is frequent borrowing. If you are taking a personal loan to meet your daily expenses, you should re-evaluate your budget and income sources. With no regular income or meagre inflow of cash and a loan to meet your daily expenses, a personal loan could be the source of stress and lead to accumulation of debt. As such, you might not want to go for a personal loan for your day-to-day expenses if your income is unstable.  

In conclusion, a personal loan could be a great way to address your financing requirements. But you must have a plan to repay the loan in full on time before applying for one. Also, keep in mind that your total debt-servicing commitments shouldn’t ideally exceed 40% of your household income. You can also consider other financing options like a gold loan, credit card-linked preapproved loans, micro-loans and loans against FDs, endowment plans and mutual funds after through comparison of options and evaluation of their features to best meet your loan requirements.

BankBazaar.com, India’s leading online marketplace for loans and credit cards. 

Need help in calculating your EMI? Use BankBazaar’s easy Personal Loan EMI calculator.

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