If you stare at a financial crisis and need funds urgently – you will invariably have a temptation to raise a loan. Now with a range of fintech platforms offering loans aplenty, it is highly unlikely not to opt for a personal loan.
Most unsecured loans charge a higher rate of interest, thus putting a lot of pressure on your future income. RBI’s latest financial stability report (FSR) 2024 revealed that the share of household debt has risen considerably from 36.6 percent of GDP in June 2021 to 41 percent in March 2024 and later to 42.9 per cent in June 2024.
It is, therefore, imperative to take loan only when it is unavoidable so that you don’t gradually slip into a debt trap.
Key tips to help you stay out of debt trap
I. Borrow what you need: You should not over-borrow just because you are eligible for a higher amount. So, at the outset you need to evaluate your actual requirement and then take a loan which you are comfortable repaying.
II. Choose the right tenure: Shorter tenure means higher EMIs but lower overall interest whereas longer tenure means lower EMIs, but higher total interest paid. So, you should choose a tenure which suits your repayment ability comfortably.
III. Compare interest rates and charges: Interest rates on unsecured loans typically range between 10 per cent to 24 percent per annum depending on your profile and creditworthiness. So, you should compare different offers from banks, NBFCs, and fintech lenders before opting for a loan.
You should check for the hidden charges such as processing fees, foreclosure penalties, and late payment fees.
IV. Check your credit score: A credit score above 750 increases chances of getting a lower interest rate. Too many loan applications in a short period can hurt your credit score.
V. Avoid add-ons: Several lenders try to sell loan insurance you can opt out of. So you should read terms carefully and opt out of unnecessary add-ons.
VI. Loan repayments: It is advisable to set up auto-debit or reminders to avoid late fees and penalties. You should make prepayments whenever possible to bring down the interest burden.
VII. Multiple loans: Several loan instalments can exert a lot of pressure on your finances. So, if you already have other loans such as home loan, car loan, credit card dues then do reconsider taking a personal loan.
VIII. Loan apps and predatory lenders: You could avoid unregulated loan apps which offer quick loans but charge extremely high interest rates. So, it is recommended to always borrow from RBI-approved banks or NBFCs.
(Note: Raising a loan comes with its own risks. So, due caution is advised)
