Summary of this article
Personal Loan Diwali Offer: Applicants should be mindful of these five things before applying for a personal loan this Diwali
The festive spirit of Diwali has spread across India. Households are getting ready to welcome the goddess of prosperity and take part in the celebrations ahead.
The occasion is also considered auspicious for making major purchases such as buying new vehicles and pricey consumer durables. For many, borrowing a personal loan offers a way to make these purchases with ease. But even amid the festivities, borrowers should remain cautious while availing personal loans.
Caution becomes even more important amid the festive season as banks and other financial institutions offer lucrative personal loan schemes. The allure of these personal loan schemes and the ease provided by digital lending apps create a strong urge to borrow bigger amounts to fund the festive spending.
According to data by the Reserve Bank of India, credit card spending touched an all-time high of Rs 2.02 trillion in October 2024, driven by the festive season. The month saw a 13 per cent year-on-year increase in spending. The spending surge also resulted in a 14.5 per cent month-on-month growth, marking the highest monthly growth seen in the last year.
While the money borrowed via personal loans can boost your happiness during the festive season, irresponsible borrowing can lead to a post-Diwali debt, which can negatively impact your finances long after the festivities are over. Here's a look at some key things borrowers should be mindful of before applying for a personal loan this festive season:
Be Mindful of The LTI Loan Cap
The Reserve Bank of India introduced new guidelines for banks and financial institutions. RBI's cap on the loan-to-income (LTI) ratio was also among the new rules announced. As per the rule, a borrower's total EMIs (including the new loan and existing loans) cannot be over 50 per cent of their monthly income.
Notably, this new loan-to-income rule applies to all unsecured personal loans regardless of the amount. The RBI also urged lenders to verify the existing debt obligations of loan applicants before approving their applications. The apex bank has also made the self-declaration of existing loans insufficient for availing new loans.
By being mindful of the LTI loan cap, borrowers can be better prepared and apply for a loan amount which is in line with their earnings. By applying for a loan amount which is within their LTI ratio, borrowers can better manage their debt and positively affect the chances of having their loan application approved. Manasvi Garg, chartered financial analyst (CFA) and founder and CEO of Moneyvesta, a wealth management company, told Outlook Money that it is advisable to keep your monthly EMI less than 30 to 40 per cent of your total monthly income
"Ensure total EMIs (all loans combined) stay well below your income. RBI's new rule caps personal‐loan EMIs at 50% of net monthly income. In practice, it is advisable to have EMIs less than 30–40% of income to safeguard savings," Garg said
Credit Score-Based Lending System
Credit scores impact the chances of having your loan application approved. Typically, having a high credit score can increase the chances of your loan application being approved. However, the RBI has directed lenders to strongly emphasise credit scores in the loan approval process. RBI has also urged lenders to cap loan amounts based on borrowers' credit score ratings. Borrowers with a credit score of 750 and above are likely to secure as much as 100 per cent of the amount they wish to borrow. However, borrowers with lower credit scores may end up not getting the complete amount they wish to borrow.
Differentiate Between Needs and Wants
Just like any other form of borrowing a personal loan has to be a well thought out decision and not an impulsive one. Before falling for lucrative loan repayment schemes borrowers should differentiate their needs from wants. Garg told Outlook Money that borrowers must set a clear budget and repayment plan which factors in their needs before applying for a personal loan.
"Borrowing during festivals is common; people should maintain discipline and plan to prevent a post-Diwali debt hangover. We should be focusing only on essential spending and borrowing only what we can comfortably repay. Before taking any festive loan, set a clear budget and repayment plan," Garg said.
Research Multiple Loan Offers Thoroughly
Before applying for a personal loan, borrowers should conduct thorough research and avoid being swept away by the first offer they receive. Typically, interest rates on personal loans can vary significantly, ranging between 10 per cent and 24 per cent per annum. Garg urged borrowers to look beyond the interest rate and focus on finer details of the loan offer such as the type of interest rate and the repayment period. Garg also urged borrowers to check whether the lender offers flexibility in due dates for repayment.
"Note whether the rate is fixed or floating. Compare rates across lenders, personal loan criteria that can vary widely. Make sure the loan amount and repayment period suit your budget. Ensure the EMI won't overextend your monthly cash flow. Confirm how and when EMIs are debited, and if there is any flexibility (e.g. change in due dates)," Garg said.
Explore Alternatives To Personal Loans
While personal loans offer an easy and convenient way of borrowing money, using personal loans to fund the entirety of your festive budget may not be the best idea.
Garg told Outlook Money that borrowers can explore alternatives to personal loans to reduce high interest borrowings. He added that applicants can explore other loan options which can be availed at a relatively lower interest rate to reduce the overall interest burden.
"Personal loans aren't the only way to fund Diwali expenses. Consider these lower-cost or more flexible options where possible. Some options which can be explored include secured loans against assets, these usually have lower interest (often 8–15 per cent) since they're collateralised, gold loans can also be availed as the interest rates applicable on such loans range between 8 to 18 per cent," Garg said.
To conclude, a personal loan can be used to efficiently manage your finances during the festive season if used prudently. However, this can only happen if the loan applicant borrows responsibly, ensuring that the repayments don't strain your future finances.
