Taking a personal loan can be one’s best decision for managing high-value expenses, but then again, it calls for proper planning. Ravi is contemplating taking a personal loan of 25 lakh to take care of his child’s tuition fees and a family tour. He pays ₹5,55,999 on tuition fees and so will be left with ₹19,44,001.
However, repaying a 12% interest for the loan would mean that he will have to pay ₹3,00,000 in interest in five years. So, Ravi needs to utilise the remaining amount smartly to not incur excessive interest costs that would render futile all his efforts at achieving his financial goals.
Understand the Loan’s Purpose
She should ensure that she takes the loan in tandem with her goals. Example: If Priya invests the balance amount of ₹19,44,001 through a mix of FDs and bonds, she can earn 6% there, and that will give her ₹1,16,640 by the year’s end.
But for such a loan with a 12% interest rate, she will have to pay ₹60,000 annually in interest. Interest costs would then reduce Priya’s absolute net gain, thus illuminating the necessity of proper investment planning to offset loan expenses.
Advantages and Disadvantages of a Personal Loan
| Advantage | Disadvantage |
| Quick disbursal and no collateral required | Higher interest rates than secured loans |
| Flexible use for various expenses | EMI payments can strain your monthly budget |
| Can help with urgent financial needs | Hidden charges may increase the overall cost |
Compare Loan Interest Rates
If Sameer accepts the loan at 12%, he’ll pay ₹3,00,000 in interest over five years. But if he manages to get a lender that will lend him the same amount of ₹40 lac at 10%, he can actually cut his interest payments down to ₹2,50,000 and save himself ₹50,000. This shows how small differences in interest rates add up to large amounts after five years.
Watch Out for Hidden Fees
Some loans may have processing charges as well as late fee charges for certain due dates. For instance, if Neha is charged a 2% processing fee on a loan amount of ₹25,00,000, she will pay ₹50,000 upfront. More so, if she misses a single EMI, the lender might charge ₹1,000 per missed payment. Missing two payments would cost her an extra ₹2,000. Such little charges can quickly add up. Hence, every loan term should be considered closely.
Keep Track of Your Loan Progress
Loans and investments need to be reviewed regularly for their performance. In this case, Arjun invests 5,00,000 from the amount of his loan into mutual funds. After three months, the fund loses 8%. This equates to a loss of ₹40,000 on his investment. A review of the portfolio every quarter ensures that Arjun has minimal losses by transferring funds to safer options and that financial goals are not derailed.
Slowly Build Financial Discipline
A personal loan could help fund very important goals, but there must be disciplinary savings. For example, Rina can promise to save ₹5,000 a month. Supposing that returns are at 8% over 10 years, then this amount would amount to ₹9,00,000. If the loan is kept in proper discipline and money is saved regularly, Rina may provide herself with a financially secure future to avoid lending extensively to her loan.
Conclusion
Personal loans are excellent financial management tools, provided they are used prudently. Know what you need the loan for, compare interest rates, consider how much you will pay in monthly instalments, and make prepayments if possible. You will have your borrowings to good use. Review your investments and tight repayment schedule so you will not get caught up in a debt trap.