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    Impact of personal loans on financial planning: Here are the pros and cons

    Personal loans can significantly impact your financial planning, both positively and negatively depending on your circumstances.

    Abeer Ray
    Published28 May 2024, 11:21 AM IST
    Personal loans can affect your financial goals in myriad ways.
    Personal loans can affect your financial goals in myriad ways.

    Personal loans can be both beneficial and detrimental to financial planning. Let's go more into both the positive and negative aspects.

    The benefits of a personal loan include 

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    • Access to funds for specific financial goals. This can be useful for placing a down payment on a house, consolidating high-interest debt, or financing home renovations.
    • Consolidation of high-interest loans, such as credit cards, into a single personal loan with a reduced interest rate to save money and simplify repayment. This may free up cash flow for other financial objectives.
    • Improving your credit score by borrowing responsibly and repaying on time for your personal loan. This can lead to better loan terms (such as lower interest rates) when applying for other loans in the future.

    The drawbacks:

    • Getting a personal loan raises your overall debt amount. Your budget may be burdened if you improperly handle your monthly payments. Make sure you can afford the additional repayments before taking out the loan.
    • Interest charges are associated with personal loans, raising the total cost of borrowing. Pay attention to the interest rate and other fees associated with the loan to prevent paying extra.
    • Repayment of loans may take money away from retirement or down payment savings.

    Personal loans integrated into financial planning

    This is a summary of how to incorporate personal loans into your budget.

    • When used sensibly and according to your financial plan, personal loans can be advantageous. Think about other ways to accomplish your objectives and carefully weigh the advantages and disadvantages of the loan.
    • When creating a budget, take monthly loan payments into account. After all of your bills are paid, make sure you have enough spare cash.
    • To save money on interest, think about repaying your loan early.

    All things considered, personal loans can be a helpful financial tool, but it's critical to comprehend how they impact your overall financial plan. If you weigh the benefits and drawbacks carefully and integrate the loan strategically, you can achieve your financial objectives.

    Frequently Asked Questions (FAQs)

    Q. Is there any reason why I can't get a personal loan?

    People spend the money on a range of things, such as electronics, gadgets, wedding costs, paying off credit card debt, relieving immediate financial strain, home renovations, growing their businesses, and more. Since you don't have to explain for receiving a personal loan, you can use the money however you see fit.

    Q. How does one go about getting a personal loan?

    It is pretty standard in almost all banks. There are five steps in the procedure, which are as follows:

    • Make loan applications
    • Send in all necessary verification documents
    • The banks evaluate applications and carry out additional duties. It might also entail an investigation team from the bank coming to your house
    • The bank notifies the applicant of the status of their loan application, which can be approved or denied
    • Loan amount paid back

    Q. Why do personal loans have such high interest rates?

    This is a result of the hazards. Since personal loans are unsecured loans, banks are not required to request any collateral to provide funds. Because of the likelihood of default or nonpayment of dues, which would affect their profitability, banks face a significant risk element. More interest is charged to lower the risk.

    Q. Can I reapply at the same financial institution if my loan application is rejected?

    You must first ascertain the reason behind the rejection before moving further. For instance, your primary objective ought to be raising the score if the loan application was denied due to a low CIBIL rating. Your chances of being turned down for a loan are the same whether you apply with a different lender. Getting a loan through cooperative banks or peer-to-peer marketplaces is an alternate approach.

    Q. What steps should be taken after closing a loan account?

    The most important thing to do after repayment is finished is to get a bank loan closure letter. The only evidence that you have no debt to the bank is this. Many people think that the borrower's obligation ends when the debt is completely settled. But legally speaking, if false information is discovered in the CIBIL record, or if a new loan is later applied for, the only documentation utilised in any dispute with the bank is either the closure letter or the nodal certificate. After everything has been done correctly, verify your CIBIL score to make sure the lender has closed the loan and there isn't any balance owed on file.

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    First Published:28 May 2024, 11:21 AM IST
    HomeMoneyImpact of personal loans on financial planning: Here are the pros and cons

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