Should you really take a personal loan for festive gifts? The truth may surprise you

As the year-end festive season approaches, many people feel stressed about stretching their budgets for celebrations and gifts. With seamless digital disbursal of personal loans and approvals becoming commonplace, these personal loans often appear to be a comforting solution.

Still, what is important to understand is whether borrowing for year-end festive gifts and non-essential expenses is financially wise. Here is a fair assessment of the same.

Why is festive borrowing rising in the country?

The country is witnessing a surge in consumer credit. This is primarily driven by simplified KYC, application-based lending institutions and instant disbursal of personal loans or credit cards, provided basic eligibility criteria are met.

These developments have holistically made personal loans more accessible than ever. Still, financial advisors time and again caution borrowers that convenience should not take precedence over prudence.

When is taking a personal loan reasonable?

Taking a personal loan can make sense in the following situations:

1. If you have a solid buffer, a stable income and the capacity to smoothly repay personal loan EMIs.
2. If the overall personal loan is a small ticket and will not disrupt long-term financial prosperity.
3. If the alternatives are either unregulated loans or high-interest credit card debt, where revolving balances can become even more expensive with time.
4. In unavoidable cases, such as personal tragedies, accidents, surgeries, or other significant life events where the need for funds is immediate and indispensable.

When should you think twice before borrowing?

When you are applying for a personal loan to cover non-essential expenses, such as parties, travel, or purchasing expensive products and services like clothes, watches, avoidable digital subscriptions, and gifts, then, in all such cases, you should ask legitimate questions of yourself on the reasons for availing such a loan. Not only this, but you should also consider the following risk factors.

1. Personal loans carry high interest rates and are one of the costlier forms of unsecured borrowing. They are costly as they do not come with collateral.
2. Paying for festive gifts and souvenirs falls under discretionary spending. When you borrow for non-essential expenses, it can strain your financial health and bring down your credit score.
3. The repayment EMIs can extend well beyond the festive season. Even a five-minute purchase based on pure emotions can turn into a twelve-month repayment obligation.
4. Managing very high debt with rolling interest payments can be emotionally draining and psychologically challenging for borrowers to deal with.
5. Smooth and seamless approvals may encourage overspending. Digital lending comfort can mask the reality behind long-term repayment commitments and the threat of legal action in the event of a borrower defaulting on personal loan EMIs or credit card bills.

In conclusion, for aspiring borrowers, availing a personal loan solely for year-end festive gifts or non-essential expenses is not a very prudent decision. Given the season encourages generosity, maintaining financial stability, composure and discipline ensures that you don’t carry festive debt into the new year.

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Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. Mint does not promote or encourage taking credit, as it comes with risks such as high interest rates and hidden charges. We advise investors to discuss with certified experts before taking any credit.