Loans: Use them wisely

As long as you are confident that you will be able to repay the loan,a personal loan can be a good option. If this condition is true in your case,then a personal loan is a good idea for the following reasons:

To fulfil short-term funding gap. If you are short of funds but are certain that you will be able to generate these funds through your own income in the coming months,then personal loans are convenient way to bridge this kind of a short-term financial requirement.

The process to apply for these loans is not very challenging,nor does it involve a lot of paperwork. Your can get funds almost instantly. So,for instance if you need money to deal with a need a medical emergency in the family,or say an unplanned expense like replacing your kitchen stove,a personal loan can be very handy.

Flexibility in use. Unlike certain categories of loans where the use of funds is narrowly defined,you get a lot of flexibility in how you choose to spend a personal loan. When you take a home loan,its strictly meant for the purposes of buying a house. Similarly,a car loan can only be used to finance a car. In fact for many types loans,the money is directly paid to the seller and you dont have access to it.

In the case of personal loans,no one monitors what you are using the money for. You can address any of your financial requirements as long as they are legal,e.g.,dont involve gambling. You can use a personal loan for anything from paying for a holiday to buying new clothes,or to settle some pre-existing financial dues. All you need to be confident about is that you will be able to pay this loan back.

Why is personal loan a bad idea?

A personal loan is a bad idea if at the time of taking the loan you are unclear of your ability to pay it back,within repayment period. Borrowers often rush into getting a personal loan to meet a financial commitment,but dont bother about the practical aspects of how they will repay the loan.

Living beyond your means. You should analyse how much loan you can actually afford before taking up the responsibility of paying EMIs. For instance,Satish has a monthly income of Rs. 10,000 per month. He finds it difficult to entertain his girlfriend on this salary,so takes a personal loan of Rs 25,000 so that he can take a holiday with her. As you can see,Satish is living beyond his means.

The obvious question is how will Satish pay back his loan when his salary itself is not enough for him to take care of his living expenses. What will remain of his salary to pay off this loan when it becomes due? Before any one take a personal loan,once should analyse affordability based on the following criteria:

Current income. Will your income rise in the near future such that you will have the capacity to pay this loan back when it becomes due

Current expenditure. Are your expenses going to be continue to be high such that you will have no surplus income to pay back the loan when it becomes due

Future prospects. Are you expecting a raise in your salary,or are you expecting a huge payout through a bonus,or inheritance such that you can comfortably pay this loan

Existing debts. Do you already have existing loans,and do you have the capacity to take on the burden of an additional EMI payment,or will your be stretched

If you are already not earning enough,but taking a loan to live beyond what you earn,then a personal loan is a bad idea.

Debt trap. Living beyond your means often results in the unfortunate consequence of falling into a debt trap. When you already dont have funds to pay back an existing loan,but you take a new personal loan to pay off an existing loan,you are putting yourself at a huge financial risk and into the vicious cycle of a debt trap.

This could become a never-ending cycle for you when you are forever in debt because your income is never enough to pay off all your loans. You will forever be working not to enjoy the fruits of your income,but rather to repay your liabilities to the lender.

You can fall into a debt trap under the following situations:

When you take more than one personal loan knowing that you can8217;t afford any new loans

When you already have a huge credit card balance outstanding and have not visibility of how you will pay it off because your current income is not sufficient to pay off your loans

When you are borrowing money from friends or institutions to pay off existing obligations,but are not willing to cut down on your expenses to live within your means

While loans are now readily available compared to what they were say a decade ago,before you blindly rush into taking a loan,pause to analyse whether taking a personal loan will end up being a good or a bad idea for you.