Personal Loan: While personal loans are easy to obtain, it’s not wise to take them out for every expense. Taking a personal loan for small expenses can compromise your financial stability and leave you trapped in long-term debt. Learn the details.
Personal Loan: Personal loans are one of the easiest and fastest loans available today. They come into your account within minutes, without many documents, without collateral, and without any collateral. This is why people often end up taking out more personal loans than they need.
But taking out a personal loan for every expense isn’t wise. In many cases, it can cause long-term damage to your financial health. Let’s understand the purposes for which you should absolutely avoid taking a personal loan.
For luxury or non-essential purchases
The biggest mistake with a personal loan is using it to purchase expensive gadgets, luxury items, furniture, high-end mobile phones, or upgraded electronics. The value of such items depreciates over time, while EMIs can be paid for months. Needs gone, debts remain… this is the most dangerous combination.
For Weddings and Large Social Events
People in India spend a lot of money on weddings. But taking out a personal loan for a one-day event like a wedding can burden you with EMIs for years. After the wedding is over, many people find themselves burdened with debt. Instead of taking out a loan, it’s wiser to plan your spending, use your savings, or organize a smaller event.
For Travel or Vacations
Many social media influencers promote travel personal loans as a good idea. However, this is against financial discipline. Vacations are over, but EMIs continue for several months. Saving for a trip is always a better option.
For Paying Off Old Debts
Many people think that taking out a large personal loan will pay off all their old, smaller debts. However, personal loans have very high interest rates, which further increase the total debt. Trying to pay off debt with debt is almost always a bad strategy.
Investing in the stock market or crypto
This is the most risky move. The market fluctuates. If the market falls, your investment could also fall, and the EMIs will have to be paid accordingly. This is a double whammy. Investing with a loan is never considered smart financial planning.
Gambling, Trading, or Quick Money Schemes
Many people think they will make huge profits by investing in quick money schemes. This is almost never the case. The risk of losing money is high, and the EMIs keep rising.
To Increase Expenses
Many people take loans just to show off or enhance their lifestyle, such as car modifications, expensive clothes, or premium memberships at clubs or gyms. This creates an imbalance in their expenses compared to their income, and the EMI burden keeps increasing.
Unnecessary emergency loans
Sometimes, people take loans for even small needs, considering them “emergencies.” For example, a new phone breaks down or a home appliance suddenly breaks down. These small needs can be addressed with better financial planning, an emergency fund, or savings.
Those 3 things to consider before taking a loan:
1. Is this expense truly necessary?
If it’s not a necessity, but merely a desire… don’t take out a personal loan.
2. Will this expense increase or decrease in value over time?
Travel, furniture, and electronics don’t increase in value, so taking loans for them is detrimental.
3. Will you be able to comfortably repay the EMI?
If the EMI exceeds 30% of your income, the loan can harm your financial health.
Overall, a personal loan is a useful product. However, if misused, it can be one of the most expensive loans. Only use a personal loan for essential purposes that provide long-term benefits.
Taking a loan for luxury items like travel, weddings, or investments can undermine your financial stability.
