Whether it’s a financial emergency or getting out of a growing debt load, a personal loan can help in a broad range of ways. It’s the fastest way to get usable cash without having to hold valuable collateral. However, a personal loan is one of the most expensive forms of lending because no assets or banks will back it up. If not managed properly, a personal loan can do more harm than good. As a wise borrower, you should keep these ten elements in mind before applying for a personal loan.
Take a Closer Look at Your Finances
This advice applies not only to personal loans but to all types of borrowing. You should consider your current and future financial situation before taking out a loan. A personal loan may seem like the perfect solution for your financial emergency, but if it is not managed carefully, it can disrupt your finances.
An EMI calculator is useful for this purpose. Simply enter the amount of your loan and the interest rate to find out the EMI you have to pay each month. Prepare a budget to find out your monthly expenses and savings. You need to ask yourself if the new EMI can fit into your monthly budget.
Is My Credit Score Good Enough?
Before you start applying for a personal loan, it’s crucial to know your credit rating to make sure you are eligible. Since assets do not secure a personal loan, credit criteria can be even stricter.
Unlike secured loans, where the value of your collateral becomes a fundamental factor in determining your credibility, a credit score is considered the most critical factor in personal loans. Your credit score shows your credibility as a borrower and helps the banks decide how much risk you represent for them. People with a good credit score are likely to obtain loans at a more competitive interest rate.
Ensure Your Loan Purpose Is Allowed
While personal loans are open and can be used for several purposes, not all lenders allow your loan to be used for just anything. For example, you may not be able to use your loan funds for expenses related to high school education or your business. Check with your lender to make sure that you can use your funds for whatever you need.
Determine the Amount Wisely
It’s never recommended to borrow more than you need. Analyse the purpose for which you need the loan and then calculate how much you will need. The bank may be willing to give you a more significant amount if they find that you’re more creditworthy. However, it is not advisable to exaggerate the amount. A more considerable amount means more debt and higher interest payments. So borrow only as much as you need.
What Are the Different Alternatives?
As mentioned earlier, the interest rate on personal loans is higher than the interest rate on loans secured by assets such as gold, property, a vehicle or anything else. The gold loan or complementary real estate loan can be attractive alternatives to personal loans at comparatively lower rates.
The interest rate on personal loans can range from 16% to 24%. But if you opt for a supplementary home loan (if you have an outstanding home loan), you can get lower interest rates starting from 9.50%. You should explore the possibilities of secured loans if you are willing to give a property as collateral.
Think About the Worst Case Scenario
Before signing on the dotted line, you should think about the impact it would have on your financial situation if you could not afford to pay your EMI on time. Defaulting on a loan not only results in an accumulation of debt on your head, but it also has a direct impact on your credit rating. A single missed payment can lower your credit rating, and a complete default would wreak havoc. It is, therefore, advisable to think about your future finances and act accordingly.
Have a Thorough Look at the Fine Print
Although banks are required to disclose all significant fees, you still need to read between the lines to see how this works best for you. There are several things to consider here, such as processing fees, the length of the loan, cancellation or foreclosure fees. These hidden fees, if not taken into account at the beginning, can catch you off guard later on. So read the terms and conditions; don’t rely on bank officials for full details. Do your research and make a wise choice.
Verify Your Details
Before hitting on “Submit”, check your request. Missing even minimal details could result in rejection. If a lender cannot verify your data, they will not be able to offer you a loan.
Should I Get a Personal Loan?
If you have a budget, a personal loan can be a smart way to finance a project or consolidate debt. Although a personal loan is not free – you’ll pay interest in addition to the principal – staggering payments could allow you to take a vacation or renovate your kitchen when you might not otherwise have the opportunity. Before applying for a personal loan, ask yourself if your budget allows you to make regular monthly payments and if you are willing to spread them out over several years. Be sure to look for a reasonable interest rate and use a personal loan calculator to get an idea of how much you would pay each month.