5 Things You Should Not Do with Your Personal Loan

Five Things You Should not Do with Your Personal Loan

Personal Loans are a quick and collateral-free option for individuals who need funds for various reasons.

At ICICI Bank, we offer Personal Loans with no end-use restrictions. You can use them to renovate your home, for a medical emergency, for an unforgettable wedding, for a dream vacation, for further education and so much more.

Be Careful What You Apply for

These are just a few examples of what you can do with a Personal Loan. However, it is important to note that loans should be used responsibly and always within your means. Before applying for a Personal Loan with us or any other institution, you should consider your present financial situation and estimate future repayment capability to ensure you can afford the loan. Furthermore, it's doubly important to choose a loan with favourable terms such as a low-interest rate, flexible repayment options and minimal processing fees.

Things You Should Not Do with Your Personal Loan

It is imperative that every borrower should use the loan responsibly and avoid certain practices that could lead to financial duress. This post discusses five things you should NOT do with your Personal Loan. We will also explain why going for the lowest interest rate is not always the ideal option for these loans, despite it being the most commonly sought-after feature. Let’s begin with what you should NOT do.

1. Do Not Use Your Personal Loan for Discretionary Spending

One of the most common mistakes borrowers make with Personal Loans is using them for discretionary spending such as casual unplanned shopping sprees or dining out at exorbitantly priced places. While it can be quite tempting to use the loan to splurge on things you do not necessarily need, you must not forget that your Personal Loan has come with interest charges and other fees that add to the overall cost of what you have borrowed. Using a loan for discretionary spending can result in an unnecessarily larger debt burden that may be difficult to repay conveniently.

2. Do Not Take More Than You Need

Another mistake people make with Personal Loan is taking more than needed. This can happen when individuals don’t calculate what they need and get approval for a higher loan amount than expected or overestimate their ability to repay the loan. However, taking out more than you need will lead to you paying a larger interest amount on the money you didn’t need in the first place. Be realistic about your requirements and take out only what you need. Factor in everything to make your due calculations and use a free online Personal Loan EMI Calculator to calculate what you will have to repay in EMIs and for how long.

3. Do Not Miss Payments or Default on Your Loan

Missing payments or defaulting on a loan can invite unsavoury consequences such as a damaged credit score, collection calls, asset seizure and even legal action. It is fair to assume that you would not want to deal with any of these scenarios. This is why it is so important to make sure you will be able to afford the monthly payments before taking a Personal Loan. To ensure timely payment, set up automatic payments or reminders and if you are struggling to make payments, contact your lender to discuss your options. They will surely help you, as will we.

4. Do Not Consolidate High-Interest Debt Without a Plan

Many people consolidate high-interest debt using a Personal Loan that is indeed a smart financial move. This can help lower your overall interest rate and simplify your monthly payments through a single one. However, it is important to have a plan for how you will repay the consolidated loan, right? Simply consolidating debt without a clear repayment plan can result in a long, drawn-out debt repayment period and significantly higher costs.

5. Do Not Go for the Lowest Rate of Interest Without Considering Other Factors

Naturally, it is understandable that people go for the lowest interest rate Personal Loan. However, it's important to note that the lowest interest rate doesn't always mean the best loan for your needs. For example, a loan with a low-interest rate may have a higher processing fee or more stringent repayment terms that might make it difficult for you to repay the loan. Considering all these factors, including the processing fee is important before choosing a loan.

Why Going for the Lowest Rate of Interest Is Not Always a Good Idea for Personal Loans?

While the answer to the question, Is a Personal Loan a good idea, is yes, but here are some important reasons to know why a low interest Personal Loan might not always be a good idea:

1. Fees and Charges: Low-interest loans may carry higher processing charges, increasing the overall cost. Sometimes, a loan with a slightly higher rate but lower fees proves more economical in the long run.

2. Tougher Terms: The low interest rate could come with stricter repayment terms. Banks might require you to pay back the loan faster, leading to much higher monthly payments that could strain your budget. This also raises the question of what happens if we don’t pay Personal Loan on time, as missed payments can affect your credit score and attract penalties.

3. Stricter Rules: You might not even qualify for that low-interest loan. It is because the bank often has stricter eligibility requirements, and if you don't meet them, you could get denied or approved for a smaller amount than you need.

Ultimately, when deciding is a Personal Loan a good idea, focus on the overall suitability of the loan rather than just the cheapest rate.

By choosing a loan that meets your financial needs and is within your repayment capabilities, you can use Personal Loans to achieve your financial goals without worry.

FAQs

What happens if I don't pay my Personal Loan on time?

To know what happens if we don’t pay Personal Loan on time, it is important to understand that it may hurt your credit score, making future borrowing challenging. You may also face late fees and penalties, increasing your total debt and financial stress.

Is it a good idea to take a Personal Loan for a vacation?

Taking Personal Loan is good or not depends on the purpose. It is usually more beneficial for education fees, medical bills or home renovation rather than non-essential costs like vacations.

How can I ensure taking a Personal Loan is actually beneficial?

To decide if taking Personal Loan is good or not, use it for essential needs such as medical emergencies or debt consolidation. Always check the bank’s interest rates, understand all terms, and ensure EMIs fit comfortably into your budget.