Should you opt for a personal loan offered at a high interest rate? Make note of these points first

When you are short of funds, you could approach a lender (bank, NBFC, or fintech) for an advance. The money you borrow could be offered at a low or a high interest rate based on your credit score and income level.

The amount you choose to borrow is subject to your requirement, but the interest rate charged on a personal loan is an additional cost that you stand to bear. Typically, interest rates on personal loans are high (11-24 percent), given the unsecured nature of these loans. But how high is too high for a personal loan?

Before you decide to sign on the dotted line, make sure you have taken note of these factors.

Too high an interest?

I. EMI: At the outset, it is vital to note that the monthly EMI (which includes interest & principal) should be less than half of your monthly income.

II. Other options: When you get an offer from a lender for a loan at a specific rate of interest, and you are worried about a high interest rate, then you could compare it with other lenders. Another lender could perhaps offer you a better deal.

III. Credit score: Another factor to consider is your credit score. Typically, your interest rate could be high only when your credit score is low. But if you have a high credit score, you could explore other options for a personal loan to grab a better deal.

However, you could have a high interest in some of the scenarios. These are a few cases wherein it is alright to borrow money at a high rate of interest.

It is right to borrow at a high interest rate

1. When the need to borrow is urgent and it is more important to arrange funds to save someone's life or your business, etc. On such occasions, trying to save on interest is the last thing you would want to do.

2. When your credit score (for whatever reason) is too low to get a better deal.

3. When the amount is quite low (say ₹1 lakh) and you have a proper plan for repayment in a short period of time (say six months).

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