Applying for a personal loan? Ask yourself these questions first.

Hey, look! Banks are giving out personal loans like never before and a lot of people are flocking to them and signing their freedom away for an international vacation.

Taking a personal loan is a matter that needs to be thoroughly thought out in your head before you decide to take one.

There is no shortage of horror stories on the internet about people who’ve lost everything just because they took a personal loan that they couldn’t afford to repay. A number of things could go wrong between when the loan amount gets sanctioned and when EMIs become due. You could lose your job, or your business could fail. The asset you’ve purchased with the personal loan could end up costing you more than ever before.

Here’s a check list of questions you must ask yourself to avoid becoming a cautionary tale:

1.      When’s the right time to take personal loans?
If your life, or the life of someone very close to you is in immediate danger and the only way to save them is with an amount of money that’s over Rs.1 lakh – that’s the only time I would recommend taking a personal loan. Even then, I’d advise you to approach family or friends first, before signing off half the income in your next 36 pay checks to a bank.

The only other sensible time to take a personal loan is if you’re trying to consolidate smaller debts like those from credit cards charging interest separately. Take a loan, pay the cards off, and focus on paying your loan back. But hey, you wouldn’t be in that predicament if it wasn’t for smaller personal debt, right? So consider the value of your peace of mind against the bottomless pit of debt.

2.      Do you really need that loan?

Push your desire (whether it’s a super-expensive shiny new toy or the picture of yourself trying to hold up the Leaning Tower of Pisa) right to the back of your head and think for a minute. Think calmly. Do you really need it and is it worth being stuck to your job (or regular source of income) for the next 3 years and drawing only around half the pay from there, for a few months of fun enjoyed on another entity’s dime? Is an international holiday or -insert expense here- really worth it? Or can you do without it right now and wait for your savings to build up to a point where you can afford whatever you want on your own hard-saved money?

3.      Are the EMIs really that affordable?
EMIs are a chunk of your salary. You know, that glorious sum of money that’s credited in your account every month bringing your paltry savings up to a respectable Rupee amount. If you’re like most other people out there, your salary would barely be enough to cover the essentials and leave a small amount over for savings. Find a good online Personal Loan EMI calculator like the one on BankBazaar.com and find out how much you’ll have to pay and when.

A recurring EMI would totally throw your accounts and plans out of whack – by deducting half your salary towards EMI payments as soon as you receive it, for a loan that you may have been able to do without. Remember, interest is an actual extra amount of money you’re paying the bank for them gracing you with a loan.

4.      What happens if you can’t pay it back?

Bank representatives will never tell you the consequences when you’re taking a loan. They want the business. But if you can’t afford to repay the EMIs for any reason – even one defaulted payment will attract penalties and fines – making the EMIs all the more difficult to clear off. Missing payments will also lower your CIBIL score, making it difficult to take a loan in the future when you might actually need it.

Also consider this – how much do you value your freedom? I don’t mean the freedom of speech and all that – I mean the freedom to be able to quit your job, pack a bag, and find a mountain to trek. The freedom to tell the corporate system you work for to take a hike, and start your own business. If you value that feeling of not being tied down, then don’t take a loan unless your life depends on it. Because you will have to sit at your desk and work till you pay your entire loan off and clear all the EMIs. No matter how annoying your boss is, you’ll basically be a bonded labourer working out a type of contract.

Most importantly – remember that money cannot buy happiness. You’d be surprised how many people disillusion themselves into filling voids with large purchases.

Sure, you can technically take a personal loan for any reason (you actually don’t have to give the bank a reason as to why you need the money), even if it is just to go on an international vacation or buy something really cool and expensive, but for the love of all that’s rational please also consider that you’ll have to pay a huge amount back to the bank. Interest may seem like a low amount and the EMIs may seem easily payable, but the reality is that it’s very difficult to keep up with payments.

Consider your freedom and love for life before tying yourself down with a personal loan. Don’t strive to buy too many things that are outside your earning potential and over your level of savings. Adopt the old methods of being happy with what you have, instead of wanting what you don’t need. Borrow money from any entity only when there’s no other option available to you.