The perils of a personal loan – Why it is better to avoid them

The perils of a personal loan Why it is better to avoid them

One of the most frequent spam calls we all get is the one offering us a personal loan. These calls from hired tele-marketers posing as “bank executives” are meant to introduce various personal loan products to prospective customers. Several gullible people often assume that getting a personal loan is a very simple process. When in need of funds, they often resort to taking a personal loan as the first choice, without giving the idea much thought.

A personal loan by definition is a loan without a pre-defined purpose. It can be taken for planning a holiday, furnishing your house, clearing other debts or any other reason. Unlike a home loan, car loan or education loan, it is not tied up with any asset. So there is nothing to hypothecate to the lender. Therefore, personal loan interest rates are often higher than the other types of loans. Take the money for whatever reason, no questions asked – that’s the biggest attraction behind taking a personal loan.

Prerequisites for getting a personal loan

Don’t get fooled by the tempting offers that are made by these tele-marketers of personal loans. Once you accept their offer, the real process of customer verification starts. The best chance of qualifying for a personal loan is assured/salaried income, good credit score and clean repayment history. Once these factors are verified, the loan would be sanctioned. Borrowers with a clean credit history are likely to get personal loans sanctioned at lower interest rates, when compared to borrowers with a poor repayment record in the past.

Getting personal loans from NBFCs is a lot easier than getting it from banks. However, all lenders have stringent terms and conditions in their loan agreements, with details about interest rates, repayment duration, late payment penalties and so on. Many times, customers fail to read the fine print when they take these loans, and suffer the consequences.

Risks involved in taking personal loans

Personal loans, auto loans, home loans, business loans, working capital loans, credit cards, instalment purchase, bank overdraft – these are all various forms of credit. However the underlying principle is the same. Borrow a little now, but pay back so much more than you borrow. And if you fail to pay back in between, face the risk of punitive action. It may be drastically higher interest rates, coercion from loan collectors, public humiliation or even legal consequences.

The statistics available in the public domain about personal loan debts are really worrying, especially because the younger generation (under the age 30) seem to be the most debt ridden. Surveys reveal that these young age borrowers tend to take a personal loan for several discretionary and frivolous reasons such as hosting a party, buying expensive gadgets beyond their income means, exotic travel plans and so on.

Personal loans already come with exorbitant interest rates. They may vary anywhere between 10% – 24% p.a. in today’s market scenario. Any non-repayment of EMI attracts severe penalties, pushing the borrower much deeper into debt.

Tips to avoid a personal loan debt trap

  • Watch your expenses, there is no substitute to that. Loans are only to be used as a last resort option.
  • Maintain a clean credit history. Never have more than 2 loan/credit instruments on your name at a time.
  • Never miss an EMI payment. Set up a Standing Instruction from your salary account for prompt monthly repayments.
  • Switch to debit cards or UPI so that you only spend what money you already have. That way, you won’t get into debt in the first place.
  • Taking a personal loan to pay your credit card bill or vice versa is a terrible idea. Both are equally dangerous credit instruments. Beware.

Chit funds as an alternative to taking personal loans

Chit funds may sound like a completely different kind of financial instrument. But in many ways, chit funds can help you in getting rid of the personal loan debt trap. How, you may ask. A quick summary below:

  • Chit funds by design are a dual purpose financial instrument. They are an easy mode of saving as well as borrowing.
  • For known expenses that you are likely to incur in the short to medium term, you can plough in your excess revenue into an appropriate chit fund scheme for a tenure of 2-3 years. So when it’s time for the actual expense, your money is ready to use! No debt, no interest.
  • If in the mean-time, you are faced with a financial emergency, the chit fund gives you a quick liquidity option to tide over the crisis.
  • In a chit fund scheme, even if you pull out the entire amount early, your monthly payments cover both the principal and interest. Thus leaving you debt free at the end of the tenure.

Interested? Want more information? Get in touch with us. We will be glad to help.

About Us

Shantala Chits has been in the business of chit funds for over 2 decades now. We are a Government approved chit fund company with a 25 year successful track record and thousands of satisfied customers. Shanthala Chits is registered under the Chit Fund Act of 1982, Government of Karnataka. We are one of the most popular chit fund houses based out of Bengaluru, known for our customer satisfaction and secure investments. Get in touch with us and start with an investment scheme. We will be glad to help you out with the right scheme that matches your needs.

Anuradha C

Anuradha is a freelance writer cum corporate trainer in the IT/telecom domain with over 18 years experience. She served in senior technical and management positions in Huawei and TCS for 10+ years. Then gave up the traditional corporate ladder to go solo - in order to escape horrendous city traffic and to be at her own boss!
Anuradha C

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