Personal loans have now moved beyond covering urgent needs and aspirations of borrowers. They are now increasingly used for emotional and discretionary purchases, financing holidays, gadgets or celebratory events such as anniversaries, birthdays among other life events. This trend underlines a clear shift in how credit interplays with instant gratification and emotion based spending.\n\nElucidating on the same, Chintan Panchmatya, Founder, Switch My Loans, says \"More than 40% of personal loan applications in India are linked to lifestyle and emotional spends—weddings, vacations, home upgrades—rather than emergencies or essentials. This trend reflects a shift in consumer mindset where aspirational needs are driving credit demand. It’s critical for lenders and platforms to factor in this behavioural shift while assessing borrower intent and risk.\" \n\nWith the rapidly evolving digital infrastructure in the country, fintech platforms and leading NBFCs such as Bajaj Finance, L&T Finance, Muthoot Finance, Shriram Finance among others are now allowing personal loan disbursals within minutes through their digital applications, thus reducing the waiting time to almost zero.\n\nDue to this, several borrowers apply for and borrow funds impulsively during moments of excitement or grave difficulties. Then due to improper financial planning and lack of financial literacy most of the borrowers end up using these personal loans for non essentials expenses.\n\nSmall ticket loans especially under ₹10,000 are registering higher default rates than larger loans. This is prevalent especially in smaller towns. The gross bad loan ratios for private banks in this particular segment climbed to between 1.42% and 4.7% with pressure expected to ease in gradual fashion as the year comes to a close.\n\nFurthermore, fintech issuers reported a 90 day delinquency rate of around 3.6% notably higher in rural zones (4.1%) than in urban areas (3.3%). These crucial developments are broadly a consequence of improper financial planning, lack of financial literacy along with usage of personal loans for emotion based purchases rather than planned and calculated spending.\n\nHowever, these vulnerabilities remain concentrated in specific borrower segments and geographies. Taking a broader view, Moody’s forecasts stable asset quality for the nation’s banks, with NPAs likely to remain between 2–3% over the next year, supported by domestic growth and prudent regulatory measures.\n\nTherefore, emotional borrowing can definitely trap individuals in debt cycles. It can also result in a rise in EMIs and a consistent shrinking of repayment capacity.\n\nDue to these factors, not just the borrowed amount but even the repayment capacity and frequency of loan applications now heavily influences credit scores. It is prudent in such cases to adopt budgeting systems such as segmenting income, spending and investments and to clearly draw a line between wants and needs.

Why do we take personal loans for emotional purchases? Discover the hidden psychology behind it

The article discusses the growing trend of personal loans in India being used for emotional and discretionary purchases, such as weddings, vacations, and birthdays, rather than emergencies. It highlights the rise in default rates, the role of fintech platforms in enabling quick loan disbursements, and the impact of improper financial planning on credit scores.