October 04, 2022
Listen Should we opt for a personal loan to celebrate the next festivals?
The festive season has already started in India and the markets are ready with a variety of products and services along with attractive offers to entice consumers. Indian celebrations are usually marked by the exchange of sweets and gifts with friends and relatives. It is considered auspicious to buy new clothes, gold, goods, household goods, etc., on any festival. However, people often tend to splurge beyond their means during the holiday season by opting for personal loans, durable consumer loans, and recklessly using their credit cards. As the threat of Covid-19 has diminished, individuals are excited to celebrate festivals with family and friends, and the number of people opting for loans to celebrate festivals has increased significantly compared to previous years. But is it a good idea to opt for a personal loan to celebrate holidays? This article will answer your question.
Personal loans can be very useful in an emergency or during a financial crisis, as they can be used with minimal documentation and require no collateral. Many banks now offer instant personal loans that can be used online in minutes to specific customers.
Although a personal loan can be used for any purpose, most people tend to avail themselves of it for luxuries that might otherwise be put off. Repaying EMI personal loans can hurt your budget and other financial goals due to its high interest rate and fees.
Let’s look at the pros and cons of using a personal loan to celebrate festivals so you can make an informed decision.
Here are the advantages of a personal loan during the holiday season:
1. Lower interest rate:
Many banks and NBFCs offer special interest rate discounts during the holiday season to attract more customers. However, the interest rate on the personal loan is very high and usually ranges from 10% to 24% per year. If your credit history is strong and your credit score is good, you can negotiate the interest rate with the lender. Keep in mind that the interest rate reduction will only benefit you when the loan amount is high and the loan term is long, as most lenders only offer lower interest rates of 0.25% to 0.50% to those of the normal rate.
2. Discount on processing fees:
Lenders typically charge a processing fee of 1% to 3% on the total loan amount. However, in order to attract more customers, they offer different deals on processing fees. For example, some lenders offer personal loans at a fixed processing fee of Rs 500 or others offer a 50% discount on the processing fee.
3. No Warranties:
The biggest advantage of a personal loan is that it does not require any collateral. This means you don’t have to pledge any assets like you would for any other type of loan that requires collateral. Most personal loans are unsecured; therefore, not having collateral ultimately increases the interest rate.
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4. Can be used instantly:
Since personal loans do not require collateral and can be obtained with minimal documentation, the processing time for these loans is significantly reduced. You can get a personal loan in 2-7 business days. Apart from this, instant personal loans offered to specific customers (who have a long banking relationship and good track record with the lender) can be obtained within minutes.
5. Helps improve credit score:
If you want to build a credit history and improve your credit score, opting for an unsecured loan and making timely repayments can help. However, it is only advisable to take out a loan if you are financially disciplined and expect an inflow that can help you repay your debt. It is recommended to keep your credit utilization rate below 30% i.e. if you are eligible for a loan amount of Rs 1 crore, you should only borrow up to Rs 30 lakhs. Moreover, it is also necessary to maintain the right mix of secured and unsecured loans. Having only unsecured loans in the portfolio can negatively impact your credit score.
Here are the disadvantages of using a personal loan during the holiday season:
1. Splurge needlessly:
A personal loan is the best choice in an emergency, especially when you have no other financial support and are in dire need of funds. Unfortunately, people often apply for personal loans for instant gratification and pressure themselves into paying hefty EMIs. So, if you want to buy that gadget, jewelry or luxury item that can easily be carried over, it is crucial to analyze your needs and wants in order to resist the temptation to splurge if not absolutely necessary.
2. Monthly charge:
This will be an additional fixed monthly expense that you cannot avoid until it is fully reimbursed. It can get very stressful if you’re on a tight budget. Failure to repay on time may result in late fees and/or damage to your credit score.
3. The value of the product decreases:
When buying anything on loan, it is important to calculate the expected life of the product. Consumer durables, especially smartphones, depreciate rapidly over time. It makes no sense if your product loses value before the loan is paid off. Also, most brands release new models periodically, which makes previous models obsolete, and eventually their prices come down.
4. High Cost Loan:
While banks and NBFCs offer several deals during festivals, a personal loan is still one of the costliest. The discount of 0.25% to 0.50% offered on the interest rate is negligible if the loan amount and/or the loan term are lower.
Taking a loan is not a “bad thing” as long as you take it after analyzing your needs and having the ability to repay it on time. Using a personal loan to buy something you really need during the festival can make sense if you are financially strong to comfortably repay the loan and are confident in your financial discipline. A personal loan taken out to buy a laptop can be a good investment for someone who bought it for school and can be a financial burden for someone who bought it just to get the latest model. on the desk. Therefore, it is crucial to assess your needs and desires before opting for a personal loan in this festive season.