How often do we hear that people with no money find it difficult to secure a loan whereas those with enough monetary investments or assets can easily obtain a loan? This is true mostly for people applying for personal loans. Because a personal loan is an unsecured loan, the borrower is not required to provide any collateral to the lender.
Since these loans are unsecured, banks and financial institutions take a lot of care to go through the borrowers’ credentials before assenting to their loan applications.
If you earn enough to repay the loan you have applied for, the lenders may acquiesce to giving you the requested loan amount. However, the lender will assess your income, employment, credit score and address before accepting your loan application. The availability of this kind of loan is entirely determined by your ability to repay as determined by your previous financial records.
A personal loan is a kind of debt that you incur when you are in immediate need of money. Debt may be unwanted but not bad when you seek it for an appropriate purpose. These days, one can apply for such loans online which are then quickly disbursed, thus, allowing borrowers the benefit and convenience of minimal paperwork and an expedited process.
However, this must not encourage one to seek personal loans for frivolous reasons. There are situations and circumstances wherein you must avoid seeking personal loans. Borrowers must be aware of situations where obtaining a personal loan is not advisable.
It’s one thing to spend and another to splurge in excess of what you earn. Sometimes, spending beyond a certain limit using your credit card can land you in debt, thus, prompting you to seek a personal loan to repay the debt amount. Also, some people plan their expenses before they have decided on their earnings. This they do by taking a personal loan and then spending the loan amount on non-essential items. Shopping, travel, and eating out too frequently are examples of non-essential expenses.
You can avoid taking a personal loan if you plan your income and savings before deciding to spend. Also, refrain from wasting your money on non-essential items or buying luxury items to seek validation from your friends and peers.
Investing in the market
How many times have we been told not to invest in the market with borrowed money? Every investment has an inherent risk factor that many borrowers tend to avoid or ignore. The yearning for returns causes them to seek loans at interest rates higher than the market yield, thus, plunging them into further debt.
Also, you could be in big trouble if you take out a personal loan to invest in questionable sources or to start a business and it turns out to be a bad investment. Any investment that does not generate a positive return is a bad investment.
Know why you are taking the loan in the first place. A loan must add value to your financial situation and not aggravate your already worsening state of finances. If you are taking a personal loan for investment, borrow the amount only when you are sure that the money you borrowed would be parked in financial products that provide higher returns than the interest paid.
Low credit score
Your credit score serves as your financial identification, which implies that banks identify you because of your credit score. A good credit score is an important indicator of your financial well-being. A personal loan is not recommended if your credit score is low - 600 or lower.
Having a low credit score implies that you may be charged an exorbitant interest rate as the lender would identify you as someone more likely to default on the loan amount sought. This means that before you apply for one such loan, pay off your existing debts and improve your credit score.
Furthermore, if you already have a loan, a new personal loan may add to your financial burden. In this case, it is best to apply for the loan only if you need money quickly and can repay it on time. Before applying, compare the interest rates and loan terms offered by different banks and choose the best deal.
So many companies are laying off their employees, thus, adding to the insecurity of employment. The risk of unemployment is high. Lenders realize this and, hence, refrain from lending to those with an unstable employment history. It is possible that when you apply for a personal loan, the lender will usually carry out extensive research on your income and work status.
Banks or other financial institutions will most likely charge you a high-interest rate on your loan if you do not have a steady job. Before signing the loan agreement, make sure you have enough cash flow to pay towards your loan EMIs.
Borrowing for a friend
Remember the age-old adage, “Never have a friend that's poorer than yourself”. Seek financial security before jumping in to cover others’ financial needs. It makes no sense to borrow money on behalf of friends and relatives not eligible to seek the loan. If your friends do not repay the loan on time, the onus of debt would fall on you, thus, adding to your financial liability and destroying your credit score in the long run.
Make sure to seek a personal loan only for your own needs and not to help others sort their finances. Personal loans are costly, so you must not take the risk of taking personal loans for others because of the high-interest rates.
Be aware of why you need a loan in the first place. Avoid taking a personal loan if you can do without it. The inability to repay high-interest debt may either mar your finances or your credibility in the future, which is why applying for a personal loan rampantly may not help in the long run.