Taking a personal loan is a fairly easy process and because of its accessibility and convenience, a lot of people tend to omit the fine print. A personal loan is like any other loan in the sense that there are certain parameters and conditions that one must meet before they are eligible for a loan. However, apart from eligibility, there are certain factors that one must consider before taking a loan. A loan is a debt like any other; one which needs to be paid off with added interest. It would be wise to peruse the terms and conditions of the loan before getting into a legal agreement. Most lending organizations like banks and NBFCs tend to be honest about the terms of their loans. However, there are always grey areas and one must be cautious while treading there.
Here are ten factors you should put into consideration before applying for a personal loan.
1. Purpose of the loan
If you have a specific reason for taking a loan, make sure you don’t splurge the loan amount on unnecessary things. Financial discipline is the key towards managing your loans. The amount should be what you need for the purpose, if you borrow extra money, you are liable to spend it and eventually pay interest on the amount. This is an unwise strategy and reflects poorly on your credit score.
2. Interest rates
Personal loans tend to have comparatively higher interest rates when compared to secured loans with collaterals. A long term home loan might have a significantly lower interest rate than a short term personal loan. When you borrow money from a lending organization, you agree to their conditions. A personal loan is a short term loan and as such requires no collateral. As such, personal loans are high risk and NBFCs charge interest accordingly. Taking a personal loan implies that you are willing to pay a high interest rate for a short duration of time.
3. Credit score
Your credit score fully determines your eligibility for a personal loan. Since no collateral is involved, your credit score is the sole indicator of your creditworthiness. You must ensure that your credit score is decent if you want to get a loan easily.
4. Understand the penalties and extra fees
Some lenders charge penalties for prepayment because that means they are losing on the interest earned. A lot of lenders also charge origination fees which covers the loan processing cost. If you do not pay attention do the detail, you might end up paying more than just the interest and the loan amount.
5. Compare interest rates
One should always compare interest rates charged by different lending agencies before committing to one. A lot of similar sounding loan offers might have certain differences that might benefit you. It is always a good idea to carefully scrutinize the terms and conditions of the lending agency.
6. Think about repayment
When you apply for a loan, you should always do it with a certain amount of foresight. Remember, you have to repay it with added interest eventually. Your ability to earn will determine whether you can pay the loan back or not. Taking too many loans will also bring your credit score down. You must always think about your future financial stability.
The EMI you pay is the most important part of the loan. You should always choose a plan that you are comfortable with. Small EMI amounts will lead to a longer tenure while large EMIs might disrupt your finances. Choosing the right EMI in accordance with your earnings and expenses should be your priority while applying for a loan.
8. Other loans
If you are paying for other loans or are in debt, getting another loan is not advisable. This might significantly lower your credit score and is extremely detrimental to your financial health.
You should always ask yourself if a loan is necessary. A loan is debt which you have to pay and getting a loan for something you don’t really require is just bad financial planning. Apart from putting you in debt and lowering your credit score, it can cause complacency which is never a good thing.
10. Managing your finances
You should always consider this before borrowing money from any financial institution. Taking a loan can make managing your everyday finances difficult because of regular EMIs. Thus, reiterating a basic point; your loan amount should always be manageable and something you absolutely need. A medical emergency, for instance is a valid reason for a personal loan.
Opting for personal loan becomes much easier with Aasaan Credits, where you can get loans without worrying about the collateral and on a credit score as low as 650 points.