Personal loan is the easiest financing mode to secure funds when in a crisis situation such as to meet some medical emergency, marriage expenses etc. But as it is one set of expensive finance options with interest rates in the range of 10-12%, it should not be taken in haste as cost factor cannot be neglected. More so for some of these reasons, you should avoid taking a personal loan:
1. Do not avail a loan to invest: Under all circumstances do not avail personal loan for investing in equity and other such risky investment options. As there is a possibility that the investment amount may decline in value which instead of streamlining your finances through expected gains will only play havoc with your future financial goals.
2. Opt for specific loans such as business loans, vehicle loan etc. and avoid personal loan: Personal loans are unsecured in nature i.e not backed by any collateral security hence the rate of interest rate on these loans is on a higher side. So, instead of going for a personal loan to start a venture or buying a home it shall be wise to go for business loan or home loan, as product specific loans are offered at a more competitive rate.
3. Do not borrow for discretionary expenses: Any amount incurred over things that can be done without amounts to discretionary expense and borrowing personal loan for meeting such discretionary expenses can lead to a deeper financial crisis. But in today's era of consumerism, wherein higher consumption supports the economy, companies have been boosting the demand of their product by newer financing options such as No cost EMI.
4. Do not take personal loans for others in your name: Don't take financial burden for you just to please others as non-timely payment by them will have to be borne by you. And in a case when you already have liabilities to service, it may well be harder to cope with other such debt Consequently your credit worthiness will come at stake.
5. Avoid taking personal loans to start a business: Government has started with various competitive schemes for entrepreneurial venture and go for these financing schemes instead of the regular personal loans. As at the outset there are more outflows and hardly any steady source of income from the newly incorporated business to service the debt as per the pre-decided repayment strategy.