Should I take a personal loan ? If that is a question that you keep revisiting often, then you are at the right place. Personal loans in India seem to be a favourite fall back option and fillers whenever money is required.
I have many clients who made a down-payment of a house or a car by taking on a personal loan. Some even went travelling abroad by taking out a personal loan.
If you are one such person, then you should first read up on how loans work. The question we are pondering on today is whether this makes sense especially when you have taken it to go on vacation ?
Should I take a personal loan – example
Nirmal (name changed) is a middle class hard working person – he comes from a humble background and is currently serving a 9 am – 6 pm job in the ITes sector. His monthly income is Rs 50,000 approximately and he pays two EMIs (Equated Monthly Installments) – an education loan of Rs 10,000 approx and another for a personal loan of Rs 15,000 approx.
Needless to say, he has quite a few short term aspirations that he wants to realize but his current financial situation is suddenly looking worrisome.
The sole reason is the existence of a personal loan. Nirmal answered YES to the question should I take a personal loan and he is in trouble. The personal loan was taken out at 20% rate of interest to take his entire family of 6 abroad for a vacation.
With 50% of his take home in EMIs, Nirmal is already on the borderline of being labelled as a person who has taken too much debt. To take care of his daily living expenses, he needs a good part of the Rs 50,000 that he makes each month.
Obviously, with such a situation, he cannot save anything for his future – his financial planning does not look all that rosy. He is facing difficulty in saving for his retirement and children’s future.
Now over a period of 5 years, he will be paying an interest of Rs 3,24,298 which is more than 50% of the original principal which be borrowed (see screenshot). Isn’t that too huge a price to pay for taking a vacation abroad ? Does it make sense to go for a discretionary expense such as this by taking on a personal loan ?
The Probable Solutions
Personal loans in India currently come somewhere between 15% – 25%. That is the most expensive form of lending you can lay your hands on. If you take any other form of loan, it is anyways cheaper. So why go for it ?
One of the biggest reasons why a lot of people get loaded with such loans is because they are made available easily. If you think for a moment, you must have received a call from some bank either for a free credit card or a personal loan.
Both credit cards and personal loans are so heavily sold, that they get bought.
Even credit card debts are a must avoid – in fact, I tend to put both personal loans and credit cards in the same basket labelled AVOID. But these products are marketed so heavily and are so readily available with minimal documentation, that it looks like the most easiest way out to meet a short term gratification. It is no doubt a very easy way out but one of the most expensive ones per se.
A personal loan, if it is of a large amount, will impact your ability to take on a good loan in the future when you might need it – what if Nirmal wants to buy a house – his EMIs are currently maxed out at 50% of his take home – he just cannot take on any more loans. Was such an expensive vacation so important to take that he is now having to struggle to save for his retirement and children’s future ?
Sure, everyone might fall short of their targets and so the need of some money to go on that vacation is very strong but the solution can be many.
1. Borrow from friends – Firstly, look for a loan from your friends. After all, when will you use your Abba-Dabba-Jabba friends to your use ! Ask them first as most of them will end up lending the money which you can comfortably return over a period of time at zero percent rate of interest. If the concept of “Har Ek Friend Zaroori Hota Hain’ does not work out for you, try option 2.
2. Borrow from your family – I mean if you haven’t earned yourself the scumbag-of-the-family title yet, your generous parents might dole something out for you. That is again at zero percent rate of interest and in many cases, not to be returned if the SOTF title is NOT applicable.
3. Borrow against assets – You can look to take a loan against some assets that you have – they could be shares or mutual funds or even gold. They are cheaper than personal loans – the only issue is that you are not financed 100% of the market value of the asset. That should still be OK.
4. Cut the vacation. Period. Should I take a personal loan should be a open and shut question for you.
All of the above options are better than taking out a personal loan which is an absolute NO NO.
What are your thoughts – would you go on a vacation by taking a personal loan, however small it is ?
Very informative article. I know people who have taken personal loans and gone on overseas vacation. I think its not good to go on vacation by taking loans, it just adds to the burden. If we can plan well in advance we don’t need to take any loans. For eg. i have planned for an overseas vacation 5 years from now and also started RD for the same. So after five years i would get a lump sum amount and it won’t make a hole in my pocket.
Right Rakesh, personal loans shoudl not be taken at all.
Fist of all I liked the Image (loans loans loans) of this article :). Marketing is what making people to take wrong decisions.
Very good article the plus point of article is solutions / alternatives given. Friends and Relatives mostly can help (if you have proper reason) – ‘Jo Tera hai vo mare hai…. Jo …….’. Always good to avoid taking loans for entertainment. Ya if it’s really really tough situation and friends / relatives also not able to help…. then the last option should be Personal Loan that is too if at all you are taking you should very well calcualte the duration and interest part.
Glad you liked it Chirag.