5 smart ways to use a personal loan to manage unplanned expenses wisely

In today’s rapidly evolving economy, financial stability faces many challenges. Medical emergencies, sudden travel, unexpected costs and house renovations can easily disrupt even the most robust financial plans.

Meanwhile, household savings are rapidly declining. Borrowers are increasingly taking on new loans and credit just to meet day-to-day expenses. Therefore, it is crucial for borrowers to use credit wisely to avoid long-term financial stress.

Vibhore Goyal, Founder, OneBanc, says, “Unplanned expenses are shocks outside salary cycles. Medical bills or breakdowns deserve buffers and borrowing as a safety valve. Yet buffers are shrinking — household financial savings have slipped from 15% to 10% of GDP (RBI, NSO), and one-third of urban India has under a month of reserves. The sequence is simple: first secure your emergencies, then upgrade your life. And always choose RBI-regulated lenders so financial help never turns into financial harm.”

Why a personal loan can help

• Quick access to funds: Personal loans provide borrowers with immediate liquidity without needing collateral, making them ideal for meeting emergencies.
• Flexible repayment: Tenures range from 12 to 60 months, allowing borrowers to plan repayments based on their income, future financial goals and long-term economic aspirations.
• Minimal documentation: Digital lending has simplified approvals, with most banks disbursing funds within hours, provided the applicant meets the basic eligibility criteria and has a solid credit profile.

Smart ways to manage responsibly

1. Borrow only what’s necessary: Only avail personal loans, credit cards or home loans that you truly need.
2. Ensure that you have the repayment capacity: Use personal loan EMI calculators to ensure that repayment planning is robust. Your monthly EMI should never be more than 30-40% of your monthly income.
3. Only select regulated lending institutions: For taking a new personal loan, you should go ahead with banks and NBFCs governed by the RBI to protect yourself from unreasonable and predatory terms.
4. Automate EMIs: On-time clearance of payments will help in protecting your credit score, strengthening your credit profile, and preventing penalties.
5. Reconstruct your emergency fund: Once you are past the economic crisis, sit down with a certified financial advisor, discuss, and replenish your savings buffer to reduce future borrowing needs.

Now, before going ahead with any particular personal loan product, it is important for aspiring borrowers to understand the risks associated with personal loans. Some of the risks of personal loans are briefly discussed below:

1. High interest rates: Personal loans generally come with high interest rates as they do not require collateral.
2. Impact on credit score: Missing personal loan EMIs or skipping payment deadlines can cost the borrower immensely by damaging their credit score. This can make future borrowing more complicated.
3. Debt trap risk: Taking multiple personal loans and not managing them properly can force the borrower into a debt trap.
4. Additional fees and charges: Many personal loans come with processing fees, prepayment penalties, and hidden charges. These can cumulatively make the loan more expensive.

In conclusion, with household financial savings consistently declining, sensible and well-planned borrowing is crucial. Aspiring borrowers should carefully consider the risks of personal loans. They must plan their financial futures judiciously, ideally with certified financial advisors, to avoid complications later on.

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