Availing of a loan isn’t an easy task. Before applying for one, you must be thorough with the necessary information so that you don’t select the wrong lender, end up paying more than you should, and fall into a debt trap. Hence, examine the primary reason behind the loan and the risks associated with it to make an informed decision.
A personal loan if not managed properly could hurt your finances
When you avail of a loan, you must pay it back within a defined period at a specific interest rate. Although borrowing is not wrong, it is a risk. Loans availed with a high rate of interest such as a personal loan that helps you buy a car, a gadget, or electronics could put you at risk of debt traps. If you avail one to start a business or make an investment, you are investing in your future. What you take a loan for is far more important than at the time you take it.
Loans can broadly be classified into two categories:
- Loan for development of assets
- Loan for development of liability
When taking a loan, first think of whether you’re availing it to build an asset. Availing a loan to create capital for the future will keep you in good stead. If there’s a need for you to avail a loan for liability development such as buying an asset in the short-term or managing expenses like a personal loan, you must gauge its risks first. These are:
- Failure to make payments on time. This results in a penalty fee thus resulting in you paying more than the set amount.
- Negative effect on credit score for missing a payment. This affects your ability to borrow in the future.
- A high rate of interest. This could eat up a big chunk of your monthly income.
How to minimize risks when availing of a personal loan
To ensure that a personal loan works for you financially, you must be able to mitigate any risks associated with it. Here’s how:
- Keep a track of your finances: Review your monthly budget before you apply for a personal loan. If you already have multiple bills to pay every month, it is perhaps better to look at other forms of lending.
- Do your research: Before you apply for a loan, research the lenders in question thoroughly. Why? Different lenders consider different factors when granting a personal loan. Research helps you obtain favourable terms for your loan agreement.
- Look for the lowest APR depending on your financial condition: APR is the yearly interest to be paid for a sum that has been borrowed. APRs depend on the credit score and income of the borrower. However, different lenders offer different APRs meaning it really is worth the effort to compare!
The bottom line
Because most borrowers do not know everything there’s to know about availing of a personal loan, the odds are always stacked in the favor of the lender. If you’re looking to avail of a loan for a want rather than a need, consider saving for it. However, if you do apply for a personal loan, research and being thorough with the relevant information go a long way in ensuring that the loan is favourable and not a debt trap.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@clear.in
I write to make complicated financial topics, simple. Writing is my passion and I believe if you find the right words, it’s simple.
