Before taking out a personal loan, learn the secret '5-15-25' rule, otherwise your pockets will be empty before you know it..

In today's lifestyle, taking out a personal loan has become very easy and common. Now, with just a click on your mobile phone, the money is directly deposited into your bank account. But do you know that this easily available money can sometimes become a major burden?  People often take out loans without thinking, exceeding their capacity, and then lose their peace of mind due to hefty EMIs (Equated Monthly Installments).

But if you are also thinking of taking out a personal loan for a wedding, vacation, or any other important purpose, then wait! Because the '5-15-25' rule will be very useful for you. In fact, this rule will not only save you from the loan trap but will also keep your financial health in excellent condition. Let's understand each part of this formula.

1. The '5' Rule: Loan Tenure
When taking out a personal loan, banks often tempt you to take a loan for 6 or 7 years so that your EMI remains low. But this is where the average person gets trapped.

The Rule: The tenure of a personal loan should never exceed 5 years (60 months).
Why it's important: A personal loan is a 'consumption loan,' meaning you are using it for something that will lose its value over time. So, if you take a loan for more than 5 years, you end up paying much more than the principal amount to the bank in interest alone. The 5-year limit helps you become debt-free as quickly as possible.

2. The '15' Rule: Interest Rate Limit
A personal loan is an 'unsecured loan,' so banks charge higher interest rates on it. But it's important to know where to draw the line.

The Rule: Try to ensure that the interest rate on your personal loan never exceeds 15% per annum.
Smart Tip: If your credit score is above 750, many banks are currently offering loans at rates between 10% and 13%. So, if a bank or app is asking for 18% or 24% interest, then you should understand that you are getting into a very expensive deal. Therefore, it is often wiser to avoid taking a loan altogether.

3. The '25' Rule: Budgeting for EMIs
25 is considered the most important part of this formula. Essentially, it determines your borrowing limit.

The rule: The total of all your loan installments (whether it's a personal loan, car loan, or credit card EMI) should not exceed 25% of your monthly take-home salary.
Example: So, if your monthly salary is ₹60,000, the sum of all your EMIs should not exceed approximately ₹15,000.
Reason: If you spend half your salary on installments, where will you get the money for household expenses, children's education, and emergency funds? The 25% limit guarantees you a stress-free life.

4. Ask yourself these 3 questions before taking a personal loan
Is it necessary? ​​Can this expense be postponed? So, if you are taking a loan just for an iPhone or a vacation, think again.
Do I have a backup? If, God forbid, I lose my job, do I have enough funds to cover at least 3 months of EMIs?
What are the processing fees? Often, we only look at the interest rate, but banks also charge processing fees of around 2% to 4%. Include this in your expenses as well.

5. Tricks to pay off your personal loan quickly
If you have already taken a loan, then how do you manage it according to the '5-15-25' rule?
Part payment: As soon as you receive a bonus from the office or earn extra income from somewhere, pay off a part of the loan. This will reduce both your loan tenure and interest.
Balance transfer: If another bank is offering you a loan at an interest rate lower than 15%, then transfer your existing expensive loan there.

 6. The Magic of Credit Score
Remember, the '5-15-25' rule will only work for you if you have a good credit score.
Pay your installments on time.
Do not make frequent loan inquiries.
Use only 30% of your credit card limit.
A good score gives you the power to negotiate with the bank.

Important things to remember for a Personal Loan
A personal loan is not bad, provided it is taken with discipline. The '5-15-25' rule is like a 'Lakshman Rekha' (a boundary) for you. So, if you take a loan within this limit, your financial health will never be compromised. Take only as much loan as you can easily repay, because nothing is more valuable than a peaceful night's sleep. (Note: This information is based on general knowledge; for more detailed advice, please consult a financial advisor.)

Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.