Choosing a personal loan to repay your last loan might benefit some individuals. Nonetheless, someone who opts for this type of loan for the first time must understand the responsible use of it. Instant personal loans have become popular in India. After all, it helps you fulfil your financial needs, like funding weddings or paying medical expenses.
In addition, it also enables you to make any big-ticket purchase and repay your credit card bills. But it might make you fall into debt if not managed responsibly. So, let’s find out how to utilise the personal loan amount to avoid debt traps in this post.
What is a Debt Trap? Why Do You Fall into It?
A debt trap is when you make a default on your loan. So, an individual may fall into the debt cycle if they fail to pay the loan monthly. Such a scenario arises due to a wide range of reasons, mentioned below:
High Rate of Interest
Your credit score determines the interest rate a lender would offer. Suppose it’s high based on your lower credit score. So, it will increase your EMI amount.
Thus, it may take a significant portion of money each month. So, it becomes difficult for you to manage the fixed monthly financial obligations and necessary expenses. Such a situation may result in a debt trap.
Need to Pay Many Debts Simultaneously
Having multiple debts can result in financial stress. Suppose the loans come with different terms and due dates. On top of that, the interest also differs from one loan to another. Hence, this type of circumstance may make you fall into the debt trap. So, it becomes difficult to manage multiple debts simultaneously.
Medical Emergencies or Job Loss
Financial hardships such as medical emergencies and job loss may bring debt issues into your life. So, keeping up with the rising cost makes it difficult for you to pay off existing debts responsibly. Such a scenario results in mounting credit card bills, too.
Understanding Personal Loans
You can opt for a personal loan from a bank, non-banking financial company (or even a lending institute). This type of instant personal loan online does not include any collateral. By checking your documents, your lender only evaluates your credit score or other loan eligibility.
Altogether, it’s an excellent way to consolidate debts or meet unexpected expenses. But you should always use it responsibly. You can discuss the loan amount and fees (including the interest charges) with your lender to understand how much you can afford. Following are the tips to avoid a debt cycle by using personal loans responsibly.
Choosing Personal Loan without Falling into the Debt Trap – Tips to Follow
You must evaluate your ability to repay the loan on time before understanding the personal loan amount and eligibility. This ensures you do not fall into the debt trap. Note that personal loans have tenures ranging from twelve to sixty months. Your repayment depends on the amount, including the interest rate and the tenure. You can estimate the monthly loan repayment amount by considering these:
- Evaluate Your Income and Expenses Monthly
While evaluating the loan’s affordability, consider the monthly income and existing expenses. The general rule of thumb considers the total debt, including the EMI. You can calculate this by adding your monthly income, including salary or business income and other types of income like rental.
Enlist your existing financial obligations like mortgage or car loan EMIs and more. After calculating the amount, you can subtract your expenses and other EMIs from the remaining amount. Ensure you can pay the EMI from the amount left after deducting the necessary expenditure.
- Your Job Status
Job stability is a crucial parameter when availing of personal loans. These loans have repayment tenures that range between twelve and sixty months. This means you need to make a consistent payment every month over a period of time. Lenders always prefer people with a consistent salary slip or income so that they can make payments on time.
For someone who is self-employed, the lender may consider a few aspects like:
- Your job tenure
- Employer’s reputation
- Income stability
Reputation as an employer and longer job tenure improve your loan approval chances.
So, a stable income can help you cover the personal loan EMIs throughout the repayment. On the other hand, repeated job changes and changing income may result in the denial of your loan application.
Tips to Avoid a Debt Trap While Choosing Personal Loans
Given below are the tips to avoid a debt trap while opting for a personal loan:
- Compare Different Loans
Various lenders are in the market who offer personal loans. You need to compare them and read the fine print carefully. The following are the things to consider:
- Interest rates
Compare interest rates offered by lenders (such as banks, lending institutes or NBFC in India).
- Processing Fees and Additional Charges
Lenders might charge processing fees and prepayment penalties. Read the fine print to understand these details.
- Flexibility of Repayment
A few lenders offer flexible repayment options. They may allow part-prepayments.
Opt for How Much You Can Afford
Opting for a personal emergency loan is not the end of the discussion. You also need to repay the amount within a short timeframe. So, you must borrow how much you can afford as EMIs. If you fail to make repayment for a larger personal loan amount, it might result in penalties.
Have a Fund for Emergency
Paying both the loan and unexpected medical expenses becomes challenging. Your emergency fund becomes an important consideration in such a difficult situation. You may build an emergency fund with at least three months’ salary.
Wrapping up
So, when it comes to opting for personal loans, using the amount dutifully prevents you from falling into the debt trap. Remember, the responsible use of loans is important because it helps fulfil your financial objectives.
You can better manage your finances. So, evaluate your needs for the loan and assess your repayment abilities before you opt for the loan with the above tips. Check out the top 10 instant loan app in India to compare and choose the right amount according to your preferences.
