Why Taking High-Interest Loans Can Be a Problem for You

With improved lifestyle, taking high interest loans are not uncommon. But this can lead to multiple problems that include high repayment Cost, Debt trap and Financial Stress, credit score impact, limited financial freedom and higher risk of default. Such problems can be difficult to come out from over long term, and hence the high interest loans must be avoided.

Let us understand the problems of taking high interest loans and what can be the solution to avoid such problems.

Table of Contents

1. High Repayment Costs
2. Debt Trap & Financial Stress
3. Impact on Credit Score
4. Limited Financial Freedom
5. Higher Risk of Default
What Can You Do Instead?

1. High Repayment Costs

High interest rate loans means you have to pay higher interest amounts over the loan tenure or loan period
This will lead to the major part of your EMI (Equated Monthly Installment) to go into interest payments
Remember that the interest rate is applied on your principal amount to calculate the interest amount of any month
So, when the interest rate of principal amount is high, you have to pay high interest amounts thus resulting in skyrocketing repayment cost for you
At the end of the loan tenure, you end up paying more interest amount compared to the principal amount you had borrowed

ALSO READ: Home Loan Calculation Method

2. Debt Trap & Financial Stress

When you pay high interest amount due to high interest rate, you enter into debt trap that seem to be very difficult to come out from
Your salary or income is limited and if almost 50% of the income is going into paying high interest loans, you would have less amount to cover for other household expenses
This leads to financial stress if there is any emergency that pops up that needs urgent funds
This is also called debt trap, in which case, you want to close the loan as son as possible but couldn’t do it since you are already paying high interest amount on it and the journey seems to be very long
To come out of such situations, many borrowers try to take more loans to cover for the existing loans, only to make the situation worse
Yes, you can take another loan only when the interest rate is lower than the existing loan but not otherwise
Constant financial stress can impact mental well-being and quality of life

3. Impact on Credit Score

If you miss payment of any EMI for any month, it can badly impact your credit score
Credit score is the measure for banks and financial institutions to assess your loan repayment history, so that they can lend you more loans
But if the credit score is impacted negatively, due to missed or late payments, you will not be qualified for future loans
This can avoid you from taking important financial decisions such as buying a new house or a new car on loan

ALSO WATCH: Buy vs Rent a House Which is Better [Excel Calculator]

4. Limited Financial Freedom

Due to EMI payments, your other financial goals such as saving or investing in mutual funds or stocks are restricted
You are forced to live on paycheck to paycheck, just thinking about your next salary hitting the bank account
Savings or investing is important for your long term financial stability which get impacted due to high interest loans
In such cases, your cash flow might also be impacted, making it difficult to cover for monthly expenses

5. Higher Risk of Default

The burden of paying high interest loans can increase the risk of defaults
Defaulting or loans or non payment of EMIs can lead to legal consequences and repossession of assets being taken away from you
Always remember, the material you take on loan is not yours until you pay the loan amount in full, and is owned by bank or financial institution, whether it is new house, new car or anything else
So it becomes yours only when you close the loan after paying all the EMIs
So such risk of defaults can also lead to long term financial instability

ALSO READ: 5 Ways to Save Money on Monthly Bills

What Can You Do Instead?

So what is the solution of paying high interest loans. Below are some of the solutions:

Go for low interest rate loans to pay less interest amounts
Improve financial planning and budgeting to minimize the need for loans. It is better to stop taking loans rather than managing multiple of them at once
Explore other investment alternatives or emergency funds to avoid completely relying on the loans you have to take forcefully. This is only possible with proper financial planning and budgeting

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Use Home Loan Excel Calculator that will help you to Save Interest Amount on Home Loan EMI.
Click below button to download Home Loan EMI and Prepayment Calculator in Excel:

Watch how Home Loan Calculator in Excel Works

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