Taking a Personal Loan : Be Careful to not to fall in a ‘Debt Trap.’

With the advent of instant and pre-approved loan offers, the popularity of personal loans has soared high. Personal loans are one of the simplest products that exist, and yet people end up being caught in debt traps for the borrowed loan amount. While, personal loan may seem to be a fast track solution to the cash crunch that you are facing right now, it may lead you to a crisis situation at a later stage if not handled properly.

Every bank can make you believe, that their particular personal loan offer has been tailor-made for you. Before falling prey to those misleading advertisements, analyze your situation and options carefully so that you do not have to regret later. Here is a list of things which you must consider, as a preventive measure from a debt trap.

Deceitful interest rates – Personal loan, being an unsecured one, has high rates of interest. So customers are very easily lured by the seemingly low interest rates; however, it never really means that they are going to pay any less. The really low flat interest rates are generally of no significant benefit if the borrowed amount is not much. And in fact, the payable amount of interest may at times be more than that of reducing balance basis.

Borrow what you need – Your needs may exceed your earnings, but your loan should never exceed your needs. The amount you borrow should never depend upon the amount you can easily get, but should always depend upon the amount you can easily pay. Your eligibility should not be the deciding factor, rather your need should be. Always remember, that the banks which are actively selling loan to you, will always want your borrowed amount to be larger and repayment tenure to be longer. But that’s where you have play smart, and borrow only the amount which you need.

Subtract the add-ons – The additional add-on offers for which you need not pay anything at the upfront will ultimately affect your EMIs thus increasing your burden. So don’t step closer towards a larger debt by opting for any of those accidental insurance plans, payment protection insurance etc. The interest charged is already way too much to add any of those premium charges to your EMIs.

Overall cost to be assessed – Prepare yourself for the loan, and the future interest payable on the borrowed amount. While you do this do not forget to consider other surcharges like processing fee, prepayment fee and late fee charges. All of these may either be charged flat or on a percentage basis, and varies from bank to bank.

Consider alternatives carefully – While choosing the the best option for taking a personal loan, don’t just consider the annual percentage rates, instead take the total repayable amount in consideration. This means to compare the total amount you will pay from the first payment to the last including all other charges. Comparing the total repayable amount shall offer you a better picture of the payment scenario thus preventing any risks of debt in future.

Read the fine print – Before you put in your signatures and come to the terms and conditions of the loan agreement, you must make sure that you have read those fine lines of print carefully and in fact have also read between the lines. You must be very much aware about minute details like the penalty triggered because of one day delay in the payment. These little things may have a significant effect on your loan amount and can therefore cause a situation of debt later.

So if you are planning to take a personal loan in near future, be aware about your finances and streamline your payment decisions and payments intelligently. Always remember that the banks have their traps in place to squeeze in extra money from you. It is you who needs to be more thoughtful about your decisions and actions to escape from the debt trap.