A Are you wondering how to foot that urgent medical bill or planning to go on a long vacation after the pandemic? Or perhaps you require extra money for your home renovation, or you are planning a big fat Indian wedding once things go back to normal? A personal loan can come to your aid no matter what your financial needs are. Apart from the fact that you do not need to pledge any collateral for this kind of loan, it is also a major advantage that the lender does not ask why you need it. Hence, it is advisable to follow these 7 rules before applying for a personal loan.
1. 1. Compare Lenders- You may be receiving multiple loan offers or loans at a very low interest rate via text messages or emails. But never get trapped in these offers; they might be a hoax or a scam. As such, it is better to compare various lenders out there in the market on your own; you can check places like Kapitus by going online and perusing their website. Nowadays, you can easily compare loan terms in detail, like the loan amount, interest rate, tenure and so on. Or you can approach your current lender and request for the best deal possible. Note that they will be helpful if you are repaying your current loan on time.
2.Always Check the Charges- Borrowers usually consider the interest rate aspect only while applying for a personal loan. But a cheap interest rate should not be your only lookout. Always remember that there is a fine line between your loan interest rate and loan charges. Yes, you read that right. Your lender may charge loan processing fees, foreclosure charges, part-prepayment fees and much more. So, it is advisable to check the overall loan cost and not only the interest rate. To know about these charges, always read the loan documents in detail.
3. Consider Your Needs, Not Just Your Eligibility- Borrow only what you need to address your short-term necessity. There is a possibility that your lender may persuade you to borrow a higher amount based on your eligibility. However, you must always keep in mind that a personal loan is an expensive form of borrowing. The interest rates are comparatively higher than other loan forms. And you do not want to pay for an amount that you do not need. Therefore, it is advisable to consider your needs no matter how much your lender pitches you to borrow.
4. Check Your Creditworthiness- Your creditworthiness plays a crucial role in determining your loan eligibility as well as your loan interest rate. It is the first thing that the financial institution considers before sanctioning the personal loan amount. Since this loan form is not backed by any collateral, the credit factor may be even stricter. Unlike loans backed by assets, where the collateral value is the key to determining your creditworthiness, personal loans consider your credit score to be the most essential aspect. Your credit score demonstrates your creditworthiness as a borrower and aids financial institutions in determining how risky you are to them.
5. Evaluate Your Repayment Capability- Just like the way you plan your monthly household budget, you should plan your monthly EMIs too, using an online EMI calculator. While estimating your income potential, always be truthful to yourself. You are the only one who knows how well you can repay your loan. Make an honest evaluation. Do not take out a personal loan if you believe you will be unable to pay the EMIs. Try talking to your relatives and friends for advice. Failure to pay your EMIs will result in penalties as well as affect your credit history.
6. Choose Tenure as Per Your Repayment Capability- Whenever you apply for a personal loan, your lender will always assess your repayment capacity by analysing your fixed obligation to income ratio (FOIR). It reflects how much of your income is consumed in the repayment of your debt including your existing loans. Lenders usually prefer loan applicants whose FOIR is between 40% and 50%. Hence, you should choose a loan tenure whose monthly EMI keeps your FOIR factor within the given range.
7. Check for Alternatives- As you already know by now, a personal loan comes with a higher rate of interest than secured loanslike mortgage loan, LAP, or gold loan. Depending upon various factors, your lender may charge an interest rate ranging from 14% to 24%. However, if you have some assets and are willing to spare them as collateral for your loan, you can go for a secured loan form.
Before availing a personal loan, always consider the above factors. You must also check the loan terms and conditions before signing the loan documentation. This will not only provide you with more flexibility, but also help you pay your EMIs on time and without spoiling your budget.