If you find yourself deep in debt, a quick and easy way out is to take a personal loan. This will ensure that you pay off your debt instantly, without additional interests, and pay back the money in small monthly installments. But, wait a minute – is it really that simple? A recent study conducted by Gartner showed that close to 48% of borrowers struggled to make payments on their personal loans. So, as a responsible borrower, what are some questions that you should ask yourself to avoid defaulting on your payments later down the line.
Here are four questions that you should ask yourself before taking a personal loan.
#1 Can I do Without the Loan
This may seem redundant, but the first question that you need to ask yourself is whether you can manage your personal finances without the need of the loan. A lot of borrowers take on loans only to later realize that they would have otherwise managed without the need of the loan. If it’s possible to save or borrow from relatives or friends to meet your financial needs, perhaps this is more prudent in the longer run, as you won’t have to pay additional interest. For example, if you plan on taking a personal loan for a summer vacation, first ask yourself, “can I save for a few months and manage my finances for the holiday.” Doing so will go a long way in helping you plan for other emergencies in the future.
#2 Can I Afford The Repayments
So, the bank has approved a nice big sum as a personal loan, however the monthly payments are fairly high; what do you do? As a rule of thumb, your loan payments should not exceed 30% of your total monthly expenses. This includes expenses like rent, utility payments (electricity, water, internet, and more), school fees, and other fixed expenses. Burdened by a large loan payment every month, you will inevitably regret your decision to take the loan in the first place.
#3 How Long is the Loan Repayment
This is another important question that you must ask yourself. The tenure of the loan often dictates your monthly repayment amount and the rate of interest for personal loan. If you don’t want to be burdened by high monthly payments and are not particular about the duration of the loan, it’s best to choose a long tenure loan. And vice versa, if you are eager to close the account in short-time and are not concerned about the high monthly payments, consider a shorter tenure loan.
#4 How Will a Loan Impact My Credit Score
Applying for any form of credit will impact your credit score. Taking a personal loan too will have a negative impact on your credit score; albeit temporarily. Overtime you can improve your credit score by making loan repayments in a timely manner. Remember, any defaults on your monthly installments will have a negative impact on your credit score. This way making or breaking credit score is entirely in the hands of the borrower.
Final Thoughts
A personal loan can be a lifesaver in times of need. Before you decide on taking a loan, make sure you go over the four points mentioned above. If you have more questions regarding personal loans, head-over to Finserv MARKETS. The platform lets you connect with the best lending partners in India. You can avail loan amounts up to Rs. 25 Lakhs and with tenure of up to 5 years.
