Achieve Your Dreams: Personal Loan Planning Guide

Successful Personal Loan planning lies in understanding how this tool fits into your broader financial plan and keeping certain considerations in mind. Reports have shown that in the past year, personal loans have increased by 14% due to their ease of application and wide usage range. Planned well, they can help you achieve your dreams faster while maintaining your financial health. Here’s how to successfully plan your Personal Loan.

Tips on Personal Loan Planning

Here are the top tips for Personal Loan planning:

Be Clear About Your Goals
Before applying for a loan, establish what you aim to achieve and allocate realistic time frames to each goal. When your objectives are specific, you can gauge if a Personal Loan is the best available option, and knowing the precise amount required enables you to borrow just what you need.

Short-term objectives would range from 1 to 3 years, e.g., wedding costs or unexpected medical bills. Medium-term goals may be courses in skill development or debt repayment over 3-7 years. Long-term targets like business entrepreneurship may be more than seven years ahead. Every category requires different financial planning strategies.

Also Read: How to Set and Achieve Short-Term Financial Goals: A Step-by-Step Guide

Understand Your Cash Flow
Successful Personal Loan planning begins with a thorough analysis of your income and expenses. Calculate your monthly take-home salary post taxes and deductions. Include all sources of income, including rental income, freelance earnings, or investment returns.

Next, categorise your monthly expenses into fixed costs (rent, insurance premiums, loan EMIs) and variable expenses (groceries, entertainment, dining out). This exercise reveals your disposable income and helps determine how much EMI you can comfortably manage without straining your budget.

Recent data from the Fintech Barometer reports that Personal Loan delinquencies have gone up by a staggering 44%. This underscores the importance of understanding your cash flow and preventing loan defaults.

Manage Debt
Having a complete picture of your debt enables you to make better decisions regarding new borrowing. It also impacts your chances of loan approval, since lenders prefer applicants with a low debt-to-income ratio (below 30%). Here’s how to look into debt management:

●    Compile all existing obligations, such as credit card outstanding balances, existing loans, and their corresponding interest rates. 
●    Use your cash flow understanding to plot out a financial plan, outlining how you will manage your current debt with a debt-management plan in place.
●    Work on a system that moves you away from future debt buildup. Taking a Personal Loan will itself be added debt; you want to ensure you can manage the debt buildup without defaulting on your loan.
●    If you’re taking a Personal Loan for debt consultation, ensure that you’re getting a better deal with a lower interest rate on your loan.

Also Read: 6 Crucial Debt Management Tips to Learn in 2024

Plan for an Emergency Fund
Maintaining an emergency fund becomes even more critical when you have Personal Loan obligations. Financial emergencies can disrupt your ability to service loan EMIs, potentially affecting your credit score and creating additional financial stress. Keep these in mind when chalking out your emergency fund:

●    It should cover 6-12 months of expenses, including loan EMIs.
●    In a tight squeeze, even a modest emergency buffer of 2-3 months’ expenses provides valuable protection.
●    Build your emergency fund gradually if you don’t have one before taking the Personal Loan, with small monthly contributions of ₹2,000-5,000 to create a meaningful safety net.
●    Keep your funds in liquid instruments like savings accounts or liquid mutual funds that allow immediate access without penalties.

This financial planning discipline protects your loan repayment schedule and overall financial stability.

Choose your Lender and Loan Terms

Both points are interrelated; there may be specific Personal Loan terms you’re looking for (like lower interest rates or flexible repayment tenure), while only some lenders will be willing to provide those terms. Here are points to keep in mind:

●    Longer tenures mean smaller monthly EMIs but higher accrued interest; shorter tenures mean lower interest but higher monthly payments
●    Fixed interest rates help you plan better, while flexible rates leave you exposed to potential savings from repo rate drops (or paying more with raises).
●    Loan terms and processing charges vary from lender to lender. Do your research, and use online tools like free Personal Loan EMI Calculators and Eligibility Calculators to plan your loan better.
●    If your approval seems dicey due to not meeting eligibility criteria, having a low CIBIL score, or having too much debt, explore flexible lenders like NBFCs that could be more willing to lend.

Retirement Planning
Personal Loan obligations shouldn’t derail your long-term retirement planning. It gives you a better idea of what you can afford as a monthly EMI with interest.

If your loan tenure is relatively short (2-3 years), you could temporarily reduce retirement contributions to prioritise loan repayment without too much damage. However, if you’re in your 20s or 30s, a complete halt to retirement investments could cost you significantly due to lost compounding benefits.
Consider reducing contributions rather than eliminating them. For instance, if you typically invest ₹10,000 monthly in retirement funds, reducing it to ₹5,000 while servicing your Personal Loan maintains momentum without overwhelming your budget.

To Conclude

Before you take a Personal Loan, you must compare your immediate aspirations with your long-term financial health. A loan should be a well-thought-out decision, not a shortcut to achieve your goals quicker or a cover-up for poor financial planning. 

If you’re exploring loan options, Poonawalla Fincorp offers attractive Personal Loans with flexible repayment tenures and competitive interest rates.

Frequently Asked Questions

What percentage of my income should I allocate towards Personal Loan EMIs?
Financial planning experts recommend keeping your total EMI obligations, including the new Personal Loan, within 40-50% of your monthly income. This ensures you maintain adequate cash flow for other expenses and unexpected costs while comfortably servicing your loan.

Should I use a Personal Loan to invest in markets or mutual funds?
Generally, borrowing to invest is not advisable unless you’re an experienced investor with thorough market knowledge. Personal Loan interest rates require your investments to generate higher returns consistently, which involves significant risk. Focus on using Personal Loans for definite needs rather than speculative investments.

How does taking a Personal Loan affect my credit score?
Initially, your credit score might experience a slight dip due to the hard inquiry and increased debt load. However, consistent on-time EMI payments actually improve your credit score over time. Maintaining a good payment history demonstrates creditworthiness and strengthens your personal financial planning foundation.

Can I prepay my Personal Loan without penalties?
Most lenders allow partial or full prepayment without penalties after a certain period (usually 6-12 months). Prepayment reduces your total interest burden and frees up monthly cash flow. However, ensure you maintain your emergency fund and don’t compromise other financial goals while prepaying.

Should I pause my SIPs and investments to focus on loan repayment?
This depends on your loan tenure and investment timeline. For short-term loans (1-2 years), temporarily reducing investment amounts might be practical. However, completely stopping long-term investments like SIPs can significantly impact wealth creation due to lost compounding benefits. Aim for a balanced approach in your financial plan.

What documents do I need for Personal Loan planning and application?
Essential documents include salary slips (last 3 months), bank statements (last 6 months), income tax returns (last 2 years), identity and address proof, and an employment verification letter. Having these ready streamlines the application process and helps lenders assess your repayment capacity for better financial planning.