5 Situations in which you should avoid availing a personal loan

Have you been recently offered a personal loan either by your own banker or by another bank through their telemarketers? The offer might seem attractive because of the offer of easy disbursement. However, if you are interested in such a loan you should know what other things it entails. A personal loan is an unsecured loan whereby banks do not take any collateral against the amount. These loans can be availed to meet an emergency financial needs or for some personal reasons.

Thus, it is only be taken at the time when one is in urgent need of money. These short-term loans are generally taken to restructure one’s unexpected debt but one needs to be careful while opting such loans. Personal loans are a good option only if the amount you require is not very big and your monthly budget can easily fit in the added EMI expense.

While there may be situations where you may have no options but to avail of a personal loan, there are situations where such a loan is avoidable given the generally high-interest rate attached and the high repayments.

We list here few situations for which you should not avail a personal loan

Do not take loan on behalf of others

Some people make the mistake of taking personal loans on behalf of their close friends when such friends claim they are not eligible themselves. If lenders are not giving them loans, taking the loan on your head is a very bad idea. “Whenever you think about getting a loan, ask yourself two questions. Is the loan absolutely necessary? Is the loan for an appreciating physical asset like a house? Only when the answer to both questions is yes, should you think about taking a personal loan,” said Anil Rego – CEO, Right Horizons.

Do not substitute for a regular saving

The key thing to remember about a personal loan is that it is a loan that needs to be repaid with interest over time. It is not and should not be a substitute for regular savings. So as much as possible, restrict its use to emergency situations you have no other option.

“Repay your loan in as less a time frame as possible to help you save on the interest cost. This helps in two ways. In the first place, you will not be overwhelmed by your debts. Second, and more important, you will have a fallback when you are really in an emergency,” said Navin Chandani, CBDO, BankBazaar.com

Do not opt it when specific loans are available

Do not opt for a personal loan if it for a specific purpose where you can opt for a secured loan. For example, if you are considering renovating your home, select a home-improvement loan and if you are buying a car, opt for a car loan. These are secured loans and have a lower interest rate compared to personal loans.

Do not take loan to make investments

Personal loans should not be taken for gambling, investing in stock market. “Do not take a loan to invest in stock markets or other speculative purposes. This is nothing short of a gamble where you might lose out the money invested. There are no quick ways to get rich. It takes planning, dedication, and patience to build a corpus,” said Chandani.

Do not take loan to start your business

Taking a loan and opening a business is not a good option because under such situation one may not be able to meet their cash outflow comparing to inflows over a period of time and hence, one can seriously fell into a severe debt trap. If you have a dream of becoming an entrepreneur and want to open a business of own, then one should accumulate funds through some good investment route like investing in mutual funds, holding good equity stocks, or getting funded by some good investors.