Getting a personal loan is often easier if your income is sufficient to repay the loan you have applied for. The lender would check your income, employment, credit score and residence proof before accepting your loan application. Since a personal loan is an unsecured loan, a borrower does not need to pledge any collateral to the lender. This loan is based solely on your income, credit score and past financial records.
A personal loan can be beneficial in certain situations when you need immediate funds. The loan is quickly approved and disbursed, and you can apply for it online as well. Minimum documentation and quick process make it an easy option for borrowers. However, there are certain situations when one must avoid taking a personal loan. Let’s look at those circumstances where taking a personal loan will not be advisable.
Often, we tend to spend money without thinking about how we will repay the same. Sometimes when people spend money on non-essential items, paying the entire amount in one go becomes difficult, so they choose to pay in EMIs. You must plan expenditures and save money in advance to make the purchase. Instead of paying the EMI with interest, you can save the money every month and buy when you have sufficient money. The non-essential expenditure may include shopping, travelling, eating out too often, etc.
For bad investments
It could involve any investment with high risk and uncertain returns. If you are taking a personal loan for investing in dubious sources or starting a business, and if that turns out to be a bad investment, you may be in a big financial problem. Any investment not giving you good returns is a bad investment. The funds from the personal loan should add value. If it is for investment, it must be borrowed to invest in financial products where you get more returns than the interest you pay.
When credit score is low
Your credit score is your financial identity. It is a crucial indicator of your financial health. That is why experts suggest checking your credit score every month. If your credit score is low – below 600 or lower, it is not advisable to go for a personal loan. You may be charged very high interest and also default on the loan. Every time you delay a payment, you will pay penalties as well. Therefore, repay your existing loans and improve your credit score before you apply for a loan.
Adhil Shetty, CEO, BankBazaar.com, says, “A personal loan is an unsecured loan you can avail without having to pledge your assets as collateral. While it can help you cover short to medium-term financial needs, a personal loan may be the most convenient option for emergencies when funds are needed quickly. However, if you have an existing loan, an additional personal loan may burden your finances. In such a case, it is advisable to apply for the loan only if you need funds urgently and have the means to repay it on time. Before applying, compare the interest rates and loan terms being offered by different banks and choose the one offering you the best deal.”
When your job is not stable
When you apply for a personal loan, the lender will typically perform specific due diligence on your income and employment. If you don’t have a stable job, banks or other financial institutions will likely charge a high loan interest. Before signing the loan agreement, ensure you have enough cash flow to manage the EMIs.
Borrowing for others
It is a big mistake to borrow personal loans for others when they are not eligible. If they don’t pay their EMIs, the loan will be a burden to you, and it will be your responsibility to pay the same. If you default, your credit score will also get impacted. So, borrow a personal loan only for personal requirements and not for others. Due to high-interest rates, you cannot take a chance to borrow personal loans for others.
Please also check all the pros and cons before taking a personal loan to avoid delay in repayments or defaulting on the loan.
Avoid Debt Trap
- Before signing the loan agreement, ensure you can pay the EMIs
- If your credit score is below 600, don’t go for a personal loan
- Don’t take personal loans for non-essential expenses or investments