Psychology behind personal loan decisions: How your mindset affects borrowing – check here | Mint

Personal loans have become a popular choice amongst people who are looking for quick cash to cover their expenses or if they need some financial assistance for an upcoming event or a luxurious vacation.

However, borrowing loans are not just credit but are also a reflection of your lifestyle and your psychological behaviour. Whenever you apply for a personal loan, each inquiry is registered by the credit bureaus and your credit score is affected. Let us understand the psychology behind personal loan decisions

Fear of missing out

Fear of missing out (FOMO) plays a significant role in personal loan decisions. Social media often increases this fear by showing the lifestyles of others, which influences people to borrow funds for travel, buying gadgets, or luxury purchases which they might otherwise avoid. On one hand, it may provide temporary content, however, it may throw you into a debt which you may not be able to repay.

Mismanaged future decision making

While taking financial decisions, borrowers often make some common mistakes. These are:

Over-optimism: While analysing their financial situation, people often become over ambitious and tend to take the future for granted. As a result, they end up neglecting any future uncertainties and borrow more than they can afford with keeping any backup.

Falling prey to gimmicks: Borrowers often fall prey to market gimmicks of lenders offering low interest rates and ignore checking the hidden costs and other charges. These charges may end up increasing your overall EMI without even your knowledge.

Normalising debt: The increasing popularity of personal loans have made borrowing normalised. This way people have started accepting EMI as an ordinary expense rather than a liability. This may decrease the stress involved earlier in personal loans, however, people end up taking multiple loans which after a while leads to heavy financial burden.

Stress of debt repayment: Poor financial management can lead to miscalculations while planning personal loans. This way borrowers may experience anxiety, depression and even guilt while struggling to make repayments on time. This stress is seen even higher during times when people lose their jobs or get into an emergency.

How to make the right decision for personal loans

In order to make the right decision, you first need to make a clear distinction between your wants and needs. This way you can not get tempted to borrow more than you can afford and save yourself from any future burdens. You must also compare and explore deals offered by various lenders and align them with your needs and affordability so that you can get the best deal.

You must avoid frequent hard inquiries and stay clear of your bill or EMI repayments before you approach a lender for a personal loan as this way you can keep your credit score healthy. Maintaining a healthy credit score increases your chances of securing lower interest rates and your desired loan amounts.

In conclusion, personal loans are a great option for you to consider if you want quick cash and have planned your borrowing journey thoroughly. However, you must note that personal loans attract higher interest rates than other loans in the market. Hence, choose wisely to avoid any burdens.

(Note: Raising a loan comes with its own risks. So, due caution is advised)