Here's What Not to do When Taking Out a Personal Loan

Here’s What Not to do When Taking Out a Personal Loan

That being said, people still make mistakes like these while handling their personal loans: 1. Irresponsible borrowing from banks: One of the primary reasons that people take out personal loans is to meet emergency expenditures like unexpected medical bills or reconstruction expenses / advance payments or travel expenses that have suddenly arisen. On their first loan, people plan out their repayment schedules meticulously and ensure that they don’t incur penalties. The borrowing and repaying is done after careful planning and thorough evaluation. On their second loans, though, people are much more relaxed – as all they remember is the ease through which they had funds available and met all their obligatory expenses without really suffering through repayment. This instils a kind of confidence in the borrower, which isn’t necessarily a bad thing, but is something that leads to a severely underrated but incredibly destructive type of borrowing behaviour – irresponsible borrowing. Over-borrowing is what happens when personal loans are taken for each and every expense, regardless of whether the borrower has the funds or means to raise funds through any other source. A personal loan must be the last resort, but irresponsible borrowing means that personal loans are taken out without even considering other options, and are taken at the drop of a hat without considering repayment capabilities and making plans for repayment. The implications of this are obvious, and irresponsible borrowing is the reason many people find themselves trapped by loans, instead of being freed by them. 2. Over-borrowing: An off-shoot of irresponsible borrowing, over-borrowing refers to when people take out multiple personal loans from multiple banks / lenders without really calculating their total monthly outgo towards EMI payments at the end of the month. Dealing with one personal loan repayment is usually hard enough, as banks recommend that you absolutely do NOT allocate more than 40% – 50% of your monthly income towards monthly repayments. Taking on more than one personal loan usually means that the borrower is stuck paying off around 80% – 90% of his / her monthly income, every month, towards loan repayment. This leaves 10% or less of their salary with them to survive – and very often – they don’t, as rents and cost of living in metro cities is quite high. This lack of funds causes another personal loan to be taken to facilitate survival, and eventually more to be paid back to the banks. It’s a vicious cycle that’s very difficult to escape from without debt consolidation, etc. A surprisingly large number of people have reported that they have taken out loans to pay off other loans, which is a sound plan on paper, but ends up taking a larger chunk out of the borrower’s wellbeing and salary. 3. Not reading the fine print: Taking a loan after careful consideration and planning is an excellent plan, but this plan too can fail as many people get trapped by the fine print in their loans. Once you sign on the dotted line, it means that you’ve read, understood, and accept all the details and points in that document. The problem with this is that the language used in these financial acceptance documents is usually way too complex to be understood by the common man, and that the rules protect the bank / lender’s interests in any possible eventuality. The bank also outlines its penalty charges, details of how these penalty charges will be compounded, and gives a general outline as to what extent the borrower could be held liable for missed payments, etc. Bear this in mind – the bank drafts the documents, so the document obviously contains clauses, points, terms and conditions that protect the bank’s interests. You should read through the loan document and point out to the bank / branch manager / loan agent the points you disagree with or feel should be modified to be less strict. Don’t let the bank tell you that the document can’t be modified or the terms can’t be changed – because they can. If the bank does not agree to make the loan easier on you, approach another bank – it may have better terms and may also be more open to understanding your individual situation and modifying its terms and conditions. It is very important to read through the boring labyrinthine terms and conditions and figure out to what extent you will be held liable / what is expected of you. 4. Borrow exactly how much you need, and not a paisa more: When taking out a loan, its common tendency to increase the total loan amount required to a larger round figure. The reason for this is that you feel will be able to sort out a lot more of your expenses, which aren’t directly related to the reason you’re taking out the loan. This is another very deep pit you’ll be falling into. You need to know exactly how much you need to borrow – and for a very specific purpose. You need to calculate the exact amount required and even calculate the exact amount that can be repaid each month as EMI. Suppose you have to take out Rs.80,000 as a loan for medical expenses that have suddenly crept up. The intelligent borrower would ONLY take out Rs.80,000 and meet the medical expenses, and repay the loan accordingly. The foolish borrower would round that Rs.80,000 requirement up to Rs.1,00,000 and convince him / herself that the extra Rs.20,000 can be used for miscellaneous expenses like ambulance charges, pharmaceutical expenses, etc. – which are all legitimate expenses, but which can also be met WITHOUT a loan. Remember, that extra Rs.20,000 doesn’t look like much when borrowing, but it absolutely WILL end up being a LOT more after adding in the interest component. The purpose of the loan and the amount change, here, and so does the EMI amount each month and the tenure. All the planning will go to waste if, on an impulse, the loan amount is raised to meet improperly defined objectives.