Don’t Take A Personal Loan ? This Is What Is Wrong With The Market

With the festival of light on the horizon, many lenders in India roll out tempting personal-loan promotions aimed at easing Diwali spending. But what appears as an attractive “festive offer” may hide long-term risks if not evaluated carefully. 

This article explores five key factors you must examine before accepting a personal loan around Diwali, augmented with broader research into personal-loan dynamics in India. Equip yourself to borrow smartly—rather than reacting to marketing hype.

1. Assess Your True Need and Repayment Capacity

Festive season loans often tempt with convenience and speed, but the first step is to ask: do I really need this loan? Borrowing for non-essential or impulsive expenses may lead to stress later. Recent commentary emphasises that misusing a personal loan to fund lavish trips, speculative purchases or habitual spending without a plan can derail finances.

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Once the need is validated, evaluate your ability to repay. A lender may approve you, but you must assess whether the EMI fits comfortably within your monthly budget. Industry best practice suggests keeping EMIs and other debt repayments well under a third to half of net income. Issues like existing debt and future changes to income matter. In fact, a low debt-to-income (DTI) ratio improves your eligibility and terms.

Table: Illustrative Loan EMI Scenarios

Below is a table showing how varying loan amount, tenure and interest rate affect EMI, helping you gauge affordability.
 

Estimates based on standard reducing-balance calculations; actual EMIs will vary by lender and fees.

This table shows that the monthly commitment rises steeply with loan quantum, interest rate and shorter tenures. If the EMI stretches your budget, rethinking the borrowing amount or extending tenure (if feasible) makes sense.

2. Compare Interest Rate, Fees and Hidden Charges

Festive loan offers might highlight “low interest rates,” but the headline rate is just one component of total cost. You must also account for processing fees, stamp duty, documentation charges, prepayment or foreclosure penalties, and hidden costs that may inflate the effective borrowing cost. A recent study emphasised that comparing interest rate alone is insufficient: processing fees and other charges can change the equation dramatically. 

In India, personal-loan interest rates for unsecured credit broadly range from around 9.75 % per annum at the low end to 20 % or higher depending on credit profile and tenure.

When a “festive offer” claims a 9.99 % interest starting rate, check extra conditions: minimum CIBIL score, tenure constraints, or additional charges. For example, one major bank’s offer noted “Rates from 9.99 % p.a., processing fee up to ₹6,500 + GST.”

What to look for:

• Is the interest fixed or variable?
   
• What is the processing fee, any advance stamp duty, or documentation charge?
   
• Are there costs or penalties for early repayment?
   
• Does the rate increase after a certain period?
   
• What is the actual “loan disbursal amount” after fees?

3. Check Your Credit Score, Credit History and Existing Debt Exposure

Your credit history and overall debt exposure significantly affect not only whether you’ll be approved, but also the terms you will receive (interest rate, tenure, loan amount). Many lenders consider a credit score of ~750 or above as favourable.

Also, if you have multiple outstanding obligations or high credit-card usage, your debt-to-income ratio might be high, reducing your eligibility or pushing up your rate. A cleaner credit history, low utilisation, and fewer recent borrowings improve your negotiating position.

For new borrowers or those with thin credit history, the absence of a credit record is not automatically grounds for rejection, but it may result in stricter terms.

Before signing up for a festive-season personal loan, pull your credit report, check for errors, and evaluate how the new loan will affect your debt profile.

4. Loan Tenure, Flexibility, and Foreclosure/Prepayment Provisions

When you borrow, how long you’ll take to repay is as important as how much you borrow. Shorter tenure means higher EMIs but lower total interest cost; longer tenure means lower monthly burden but higher cumulative interest. You need to balance budget practicality with cost optimization.

Festive offers may come with attractive tenure flexibility or free prepayment clauses, but confirm these. Some lenders charge a penalty if you pay off the loan early, especially within the first 12 EMIs. These exemptions or waiver offers are promotional, so read the fine print. For instance, one bank listed nil foreclosure charges only if the loan amount is above a threshold and after a minimum number of EMIs.

Additionally, check if the lender allows part-prepayment without penalty, whether there are restrictions on the purpose of the loan (though most personal loans are purpose-free), and how the EMI may change if interest rates move (for variable-rate offers).

5. Borrow Only If It Aligns With Your Financial Plan — Avoid Impulsive Use

Festivals like Diwali bring emotions, social expectations, and lifestyle consumption. While it may be tempting to treat a personal loan as instant cash for luxury spending, this can lead to regrettable outcomes. Experts caution against using personal loans for speculative investments, extravagant holidays, or covering old debts without a repayment plan.

Instead, borrow only when a thoughtful financial plan supports the expense and the repayment is practicable. Ask: will the loan help a meaningful purpose (for example, home improvement, medical emergency) or is it driven by impulse/splurge? If used to consolidate existing high-interest debt, ensure the new EMI and tenure are better than before, not just shifting the burden around. A personal loan should ideally contribute to financial improvement, not exacerbation.

Checklist before you commit:

• Can I service the EMI even if there’s a small income dip?
   
• Is there a contingency in place if I lose employment or face an emergency?
   
• Have I compared alternative funding options (e.g., low-interest secured loan, overdraft, delaying the expense)?
   
• Do I understand the long-term cost of this borrowing (including interest, tenure, hidden fees)?
   
• Am I using borrowing to live within my means, or beyond them?

Conclusion

Festive-season personal loan promotions may light up your inbox, but smart borrowing requires caution, not impulse. Before you sign on the dotted line, ask hard questions: Why am I borrowing? Can I genuinely afford the repayment? What is the full cost of borrowing (interest + fees)? Is my credit profile and debt exposure adequate for favourable terms?

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Does the loan fit into a longer-term financial plan, rather than just feeding festive frenzy? Taking the time to compare offers, check hidden costs, and align the loan with your budget and objectives will ensure you celebrate the festival of lights, and not months of debt stress thereafter.