Personal loans: Why should you avoid taking loan for travel and luxury?

When you are short of funds, you could have a temptation to borrow money. And it is perfectly alright to borrow when the interest rate and the reason to borrow are ‘right’. But what if you intend to borrow for something as avoidable as going on a vacation or for buying a luxury item.

This should definitely be avoided. Experts recommend investors to refrain from taking a loan for such purposes which can be deferred. “Personal loan should be taken only when you do not have any other option left. For example, when you can save money for six months to buy an expensive gadget, you should do that instead of taking a loan,” says Deepak Aggarwal, a Delhi-based chartered accountant and wealth advisor.  We explain the reasons to avoid personal loans in certain scenarios.

Personal loans: Avoid taking loans for these reasons

I. Save and invest: Ideally, you should save money and invest to be able to spend on avoidable stuff. Instead of borrowing money, you should save and invest.

II. Outflow towards interest: When you borrow money, you lose money in form of interest, which goes down the drain. In case of personal loan, this could be anywhere between 12-15 percent per annum.

III. Inculcating a bad habit: When you start taking loans for avoidable things such as for travel or luxury, you develop a bad habit. This can push you into a debt trap, which must be avoided at all costs.

IV. Financial goals: Taking a personal loan pushes your financial goals further down. When you borrow money for avoidable tasks, you compromise of your financial goals such as buying a house with your savings or buying a car, etc.

V. Other important reasons: There could be some genuine reasons for which you will have to raise a personal loan in future. These could be to renovate the house, for wedding, among other reasons. 

So, when you exhaust your borrowing capacity for these avoidable reasons, it happens at the expense of more important purposes. Therefore, it is recommended to avoid taking loans unless it is absolutely essential.

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