For many people, personal loans seem to be more attractive options than any other forms of credit. Because, these are offered without providing any security and are easily available if you have decent income flow. As these loans are called as all-purpose loans, they can help you do many things – buy a car, house renovation, holiday vacation or pay for essential household items.
So, if you are one among them thinking to borrow personal loans for any of your personal needs, ask yourself these questions before you rush to take debt.
1. For what am I borrowing money?
This is the first question you need to ask yourself. Think whether you are borrowing money to meet your needs or meet your wants. Need is something you must have (it’s a compulsion) and want is something you wish to have. Here are few examples that help you understand the difference between need and want.
Some of the expenses that come under need are:
• Medical emergencies
• Child’s admission fee
• Wedding expenses
Some of the expenses that come under want are:
• Purchasing consumer durables
• Financing a holiday vacation
• Purchasing a house, luxury car, etc.
After understanding for what you are borrowing money, ask yourself the next question.
2. Is borrowing a best option?
There are many ways to get what you want without borrowing money. If it is a ‘want’, you can save and buy later. It is always better to purchase things you wish only after accumulating or saving the required amount.
In case if it is a ‘need’, there is nothing bad to borrow a personal loan. However, you need to make sure that you will repay it on time. Now, if you have decided to borrow money, then you should ask yourself the third question.
3. Can I afford repayments?
Here comes the crucial part of your decision making about borrowing money. The high interest rates, fees, charges can make your personal loan more expensive, especially, if you borrow more than what you can afford.
So, you need to understand whether you can afford repayments or not. Check with your budget, whether you can keep aside some amount of money for paying EMIs or not. See where can you cut costs and generate surplus for repayments. Now, the last question is based on the challenges you need to face after taking personal loan.
4. Is this the right time to borrow money?
After making sure that you can pay the repayments, think about any changes that might affect your savings or investment plans. Also, keep view of your job security, health issues & other financial obligations. In case you are borrowing to purchase things on debt, check whether you have enough savings for emergencies before you borrow. But if you think that taking loan now can risk your other obligations, then it is better to save now and borrow later.
It is best advised to take personal loans only for emergencies. This is because, compared to other types of loans, personal loans usually have high interest rates and it would be foolish on your part to take this extra financial burden for less important and superfluous things.