What is the impact of a personal loan on my savings plan?

Taking a personal loan has a direct impact on your savings plan, primarily because it introduces a fixed monthly EMI (Equated Monthly Instalment) commitment. This regular outflow reduces the amount of disposable income available for savings or investments each month. If not budgeted carefully, you may find it challenging to maintain your previous level of contributions to recurring deposits, mutual funds, or other long-term investment vehicles. Over time, this can delay the achievement of your financial goals like building an emergency fund, saving up for retirement, or accumulating funds for a major purchase.

When used strategically, a personal loan can actually help stabilise your finances. For example: instead of liquidating investments or breaking fixed deposits which can result in penalties or loss of potential returns, use a personal loan to cover urgent expenses. This preserves your wealth-building instruments for the long term. If you use a personal loan to consolidate high-interest debts then you may reduce your overall interest outgo and free up more cash for savings in the future.

To minimise the negative impact on your savings plan, it is essential to:

• Prepare a realistic monthly budget that includes your EMI and essential expenses.
• Adjust discretionary spending to ensure you can continue regular savings.
• Avoid using personal loans for non-essential or speculative purposes, such as risky investments, as this could further strain your finances.
• Consider building an emergency fund before taking on new debt, so you are better prepared for unforeseen expenses.

By planning carefully as well as using personal loans judiciously, you can balance immediate financial needs with your long-term savings objectives. This positively affects your financial health remains intact even as you manage debt repayments.