The option of personal loans is a great tool to raise money at short notice without much hassles of documentation. The processing time is very less which makes it even more tempting option to avail when there is an urgent requirement of cash at short notice. The exact amount of money that one should take through a personal loan depends on the nature of the need and the repayment capacity of the borrower. There are several factors that one needs to consider carefully while applying for personal loan in order make the best use of it without landing up in a debt trap.
The Maximum amount Available
The maximum amount that an individual can take through personal loans is determined by the eligibility criteria that are linked to his income and repayment capacity. The general guideline followed by the banks and other financial institutions is that the amount should not exceed 2 to 3 times of the annual income of the individual. Conversely the monthly repayment installments should be restricted to 30% of the monthly income of the individual. This is to ensure that the borrower is able to repay the loan as stipulated without facing inconveniences in personal household expenses. However in the prevailing scenario of stiff competition among the financers there are many instances of people being given an amount much beyond the repaying capacity. This is where the discretionary judgment of the borrower must come into play and decide at the right figure that needs to be borrowed.
Factors to be considered while deciding on the Amount of a Personal Loan
The foremost factor that influences the decision on the amount of the personal loan is the need for the money. With this as the background for decision making the other aspects that merit careful consideration are:
- Is the amount being borrowed absolutely necessary and justifiable vis-à-vis the high interest being paid for the personal loan?
- Are there any other avenues from where a part of the requirement can be fulfilled at a lower interest rate?
- What is the rate of interest being charged on the personal loan being applied for? Are there any other banks that may provide better deals for similar loans?
- What is the maximum repayment period being permitted in the loans?
- With the repayment tenure as the guideline what is the EMI that is being worked out on the amount being applied for? Is the EMI within the reach through normal means of current earnings?
- What will be the total amount repaid in the end for the amount being applied for adding all the associated fees, charges and interest?
Consequences of a needlessly high Loan Amount
There three distinct negative consequences that people face when the amount of the personal loan is beyond their repayment capacity.
- Unnecessary expenditure that could have been avoided under normal circumstances.
- Default in payment of EMI leads to a bad credit rating that shall affect all further applications for credit.
- Difficulties in managing household budget when the EMI is beyond the normal earnings.
Keeping in view the above fallout one must decide the exact amount that unavoidable while taking a personal loan and thereafter work out ways and means to keep this amount manageable in the monthly installments.