Considering Availing of a Consumer Loan This Festive Season? Here’s the Care to Take

However, this festive cheer often comes with a financial reality check. As expenses rise, many consumers turn to loans to fund their purchases. Consumer loans, which offer the ease of borrowing for short-term needs, can seem like the perfect solution for fulfilling festive aspirations. But while loans can provide a much-needed boost to your purchasing power, they also come with significant financial responsibility. Striking the right balance is crucial; overshooting your financial capacity could lead to a debt burden that jeopardises your financial well-being long after the festivities have faded.

This article explains the key considerations to keep in mind before availing of a consumer loan this festive season. From assessing your repayment capacity to understanding the hidden charges, these tips will help ensure that your financial decisions are both festive and financially sound.

Want to Make Your Money Work While You Sleep?

Talk to Our Investment Advisors Today!

Schedule a First Consultation Call Right Now

1. Understanding Consumer Loans:

A consumer loan is a type of unsecured loan designed for personal purchases like electronics, furniture, travel, or other lifestyle expenses. These loans are often offered with flexible repayment tenures and do not require collateral, making them an attractive option for those looking to finance their festive spending.

However, the convenience of consumer loans often comes at a cost-higher interest rates compared to secured loans like home loans or car loans. Additionally, failing to make timely repayments can lead to a mounting debt pile, which can severely strain your future finances.

When availing of such loans, it is important to remember that they should be used wisely and within the confines of a well-thought-out financial plan.

2. Assessing Your Repayment Capacity:

Before you decide to take out a consumer loan, the first step is to assess your repayment capacity. Just because a loan is available does not mean it is affordable for you. Evaluate your monthly income and fixed expenses to determine how much disposable income you have available for loan repayment. A general rule of thumb is that your total EMI payments should not exceed 30-40% of your monthly income.

For example, if your monthly income is Rs 60,000, your total EMI payments, including any existing loans, should ideally be capped at Rs 18,000 to Rs 24,000. Anything beyond that could overburden your budget, making it difficult to manage daily living expenses and emergency savings.

Carefully consider whether you can comfortably handle the EMI payments without compromising other financial obligations like household expenses, insurance premiums, or investments for long-term goals.

3. Borrow What You Need, Not What You Can:

When shopping during the festive season, it is easy to be swayed by attractive offers and discounts. With retailers encouraging customers to 'buy now, pay later,' the temptation to overspend can be overwhelming. However, it is important to approach borrowing with a disciplined mindset.

Only borrow what is absolutely necessary. Do not let festive deals lure you into borrowing more than you need, as it only increases your future liabilities. For instance, if you are purchasing a home appliance, focus on the functionality and features you need rather than going for the most expensive model on credit simply because it is available on EMI.

Your borrowing should always be aligned with your needs rather than your wants. This will not only help you manage your debt better but also reduce the stress of repayment post-festivities.

4. Consider the Total Cost of Borrowing:

When availing of a consumer loan, the interest rate is not the only cost you need to consider. Lenders often attach several fees, such as processing charges, prepayment penalties, and late payment fees, that can increase the overall cost of borrowing.

For example, a loan with a lower interest rate but a high processing fee may end up being more expensive than a loan with a slightly higher interest rate but lower fees. It is crucial to ask for a detailed breakdown of all charges from your lender so that you have a clear understanding of the total cost of the loan.

Additionally, many borrowers get caught off-guard by hidden charges like insurance premiums bundled into the loan agreement. Be sure to read the fine print to avoid any unpleasant surprises.

5. Avoid Borrowing for Depreciating Assets:

While it is common to take loans for purchases like cars, gadgets, and home appliances, keep in mind that these are depreciating assets. Their value decreases over time, but your loan payments will remain the same, or even increase if you have opted for a loan with a floating interest rate.

Using loans for depreciating assets is not always a wise financial decision. If you must take a loan for such purchases, try to opt for a shorter loan tenure. This will help you pay off the loan faster, ensuring that you do not end up paying long after the product has lost its value or become obsolete.

6. Factor in Contingencies:

Life is unpredictable, and unforeseen circumstances like medical emergencies, job loss, or sudden financial responsibilities can throw your repayment plans into disarray. Before taking on a consumer loan, ensure you have a financial safety net in place. This could be an emergency fund that covers at least 3 to 6 months' worth of expenses, including loan EMIs.

Additionally, consider purchasing insurance that covers your loan repayments in case of unforeseen events. Some lenders offer this as part of the loan package, but make sure to evaluate if it is genuinely beneficial or just an added cost.

7. Focus on Long-Term Financial Health:

The festive season is temporary, but the financial decisions you make during this time can have long-lasting effects. Taking on excessive debt can strain your finances and prevent you from achieving long-term financial goals like purchasing a home, saving for your child's education, or building a retirement corpus.

A good financial plan involves balancing short-term desires with long-term goals. If you must take a loan, ensure that it does not derail your savings and investment plans. Financial discipline, even during festive seasons, is key to maintaining overall financial health.

Conclusion: Balance Aspiration with Responsibility

While the festive season is a time to celebrate and indulge, it is also essential to approach your finances with care. Consumer loans can help you fulfil your aspirations, but they should be availed responsibly. Overborrowing or mismanaging loans can lead to a debt trap, affecting your financial well-being for years to come.

Before taking a consumer loan this festive season, assess your repayment capacity, borrow only what you need, consider the total cost of borrowing, and factor in contingencies. By keeping these considerations in mind, you can enjoy the festivities without compromising your financial stability.

Remember, financial planning is about striking the right balance between fulfilling today's aspirations and securing tomorrow's financial future.

We are on Telegram! Join thousands of like-minded investors and our editors right now.

Hiral Bhuta is a Investment Consultant & Principal Officer. She is a seasoned professional in the financial services industry, currently serving as an Investment Advisor and Financial Planner at PersonalFN. With her expertise, she plays a pivotal role as the Principal Officer appointed under SEBI's amended IA Regulation. Hiral holds distinguished certifications such as Certified Financial Planner (CFP) and NISM XA & XB, complemented by a post-graduate degree in commerce (M. Com). Her primary areas of focus encompass financial planning, investment advisory, and wealth management, where she leverages her knowledge and skills to provide tailored solutions to clients. With a cumulative experience spanning five years, Hiral brings a wealth of expertise and insight to her role at PersonalFN, ensuring clients receive expert guidance and support in navigating their financial goals.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.