As the head copywriter at a major content agency, 30-year-old Ananya was earning ₹12 lakhs per annum – a decent salary in a growing town like Pune. She had started her career six years ago, with a salary that was less than half the current sum, and as her career progressed, and her salary increased, she had witnessed her lifestyle needs trend upwards.
Till two years ago, she used to share a 2bhk apartment with three others and shop for luxury items every six months, but with the rising salary, Ananya was now renting the same apartment on her own, and shopping every other weekend. With her expenses increasing faster than her salary, she began looking for ways to supplement her spending power and that is when she came across a platform offering quick and easy personal loans.
With minimal Know Your Customer requirements, and hassle-free loans worth up to 5 lakhs, given her salary bracket, Ananya found herself indulging in personal loans to augment her salary. If you have also been attracted by the magnetic appeal of easy-to-avail personal loans, in the pursuit of an enviable lifestyle, here are some things you must keep in mind.
The interest trap
While it is extremely convenient to opt for a personal loan when you want to purchase something costly, the interest attached is an aspect you should consider to avoid getting blindsided in the future. Personal loans often come with interest rates that are not the lowest available, especially for borrowers with poor credit – lenders typically assess the risk of lending based on the borrower’s credit score, and those with lower scores may face significantly higher rates.
This discrepancy means that individuals with poor credit could end up paying thousands of rupees more in interest, over the life of the loan, compared to those with good credit. Interest rates for personal loans can vary widely, typically ranging from a reasonable 12% to a steep 21%, influenced by factors such as eligibility, credit score, and loan tenure.
For individuals considering using personal loans to fund lifestyle needs, such as vacations, home renovations, or major purchases, it is important to weigh the cost of borrowing against the benefits. Additionally, improving your credit score before applying for a loan can lead to more favorable terms.
Time is of the essence
When Ananya found it difficult to pay her equated monthly instalments, due to her high expenses and an unforeseen emergency, she decided to take on another personal loan to pay off the first one – and her lower credit score, due to two skipped EMIs, meant that the next loan came with a higher interest rate.
When opting for a personal loan to fund your lifestyle, you must evaluate your cash flow to ensure that you can regularly meet your monthly EMI payments without overburdening your finances. Accordingly, it is advisable to maintain your EMIs below 35% of your take-home income, which, in Ananya’s case, would have been 35,000 rupees.
Further, please note that the loan tenure significantly impacts your repayments – while a longer tenure results in lower EMIs, it increases the total interest paid over the loan’s duration. Therefore, it is important to find a tenure-interest balance that suits your financial situation.
The devil is in the details
For Ananya, the offer of a 5 lakh personal loan had seemed like a godsend when she was considering ways to boost her spending power and accordingly, she did not go into the fine print of the offer. Before signing on the proverbial dotted line, it is advisable to consider other fees you may be required to pay. For instance, processing fees may apply on the loan and can vary between 0.5% and 2.5% of the loan amount, although they are often capped.
Additionally, it is important to take into account any prepayment penalties before committing to a personal loan – typically, these penalties are around 2% of the outstanding loan amount, if you choose to prepay within a specified period. These are all ways in which the platform can charge you on top of the hefty interest already being levied. A detail-oriented approach can also help you identify scam offers, which may try to bamboozle you with unbelievably high loan amounts and low interest rates.
Thomas Jefferson once said, “Never spend your money before you have it,” and the adage has never carried more weight than it does now, in the age of personal loans and Buy Now Pay Later policies. With Ananya’s debt mounting, and newer loans attracting increasingly higher interest rates, she realized this the hard way. Before you climb on board the personal loan bandwagon to fund your lifestyle needs, keep these important aspects in mind to ensure a hassle-free journey.
Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.
