Summary of this article
Evaluate existing savings before considering a personal loan.
Borrow only what can be repaid within six months.
Compare lenders and manage repayments to avoid financial stress.
A personal loan is an unsecured loan which is not backed by collateral. Banks typically provide personal loans starting from Rs. 50,000, whereas Non-Banking Financial Companies (NBFCs) offer lesser amounts, from Rs. 5,000 to Rs. 10,000, to meet short-term and urgent financial requirements. The interest rates on personal loans typically range from 10 to 24 per cent per annum based on the borrower's credit score, income stability, and repayment ability.
Personal loan processing charges typically vary between 0.5 and 4 per cent of the loan. Ignoring this can also result in a negative impact on the credit score of the borrower, which would cost him more for borrowing in the future.
Amol Joshi, an entrepreneur of PlanRupee Investment Services, asserts, "First, see if you have already planned for spending Diwali money via savings accounts, fixed deposits (FDs), recurring deposits, mutual funds (MFs), or liquid funds." If you have planned for it, then you have the money already, so there is no need to take a loan." He goes on further to say, "If you have not planned but can cut down your expenses, that too is okay. If you have a planned expense of Rs. 1 lakh and you only have Rs. 50,000, you could cut the planned expense to Rs. 60,000 or Rs. 70,000 rather than taking a total loan. Borrow only if you cannot cut your expenses."
The Need for a Loan
Borrowers must think very seriously about whether they NEED a personal loan. For festival spending, it is normally best to borrow just what can be repaid easily in six months. For instance, if one has a monthly excess of Rs 5,000, they may be able to service a loan of Rs 30,000 to Rs 35,000 for six months without causing undue financial hurdles.
Joshi continues, "How much you can borrow varies from individual to individual. An individual earning a Rs 50,000 per month will have different repayment potential compared to an individual with a Rs 2 lakh monthly salary. As a rule of thumb, for expenditure during festivals, you should take a loan that can be repaid within six months. This will make sure that your espenses do not affect your finances in the months after Diwali."
When asked why take the timeframe of six months into consideration for the repayment, Joshi further clarifies, "For each type of loans, the repayment tenure varies. For a home loan, as home is a lifetime asset, the repayment window is usually 20 years. But for a personal loan taken for any yearly festival, the repayment tenure should not cross six months."
Comparing Bank and NBFC Loans
Banks and NBFCs vary with respect to the amount of loan, interest rate, and eligibility criteria. Banks typically offer higher amounts of loans, which can be helpful for big expenses, but with stricter eligibility requirements and potentially lower interest rates than NBFCs. NBFCs and other online lenders accommodate smaller borrowing requirements, with loans starting as low as Rs. 1,000, but with longer repayment durations and higher interest rates.
Joshi clarifies, "The simplest short-term borrowing option is usually an overdraft of an FD, which will cost roughly the FD rate plus one per cent. That is less expensive than a personal loan or a credit card. It is possible to borrow against MFs and insurance policies, but it's generally simpler and economical to take an FD overdraft." For expenses during a festival, you need to look around for all options and select what is affordable.
Managing Loan Repayments
Once the loan is disbursed, timely repayment is of utmost importance. Borrowers should adhere to their EMI calendar without exception to avoid a penalty and adversely affect their credit rating. Using the loan amount only for planned expenses is very important since overspending can result in debt accumulation and financial tension.
Joshi further suggests, "You should not borrow because it is in trend or because others are borrowing. Borrowing to keep up with friends or social media trends may result in unnecessary debt. For short-term festival spending, it is best to borrow less and pay back soon. Saving a little regularly for next year, say Rs. 2,000 per month, may reduce reliance on loans and pay for next year's festivals."
Personal loans can be useful for financing Diwali expenses only if used sensibly. Borrowers must sure that repayment is not hindered, compare offers from different lenders, and resist the temptation of borrowing more than they can afford.
