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.
7.
EMI
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.
9.
Necessity
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.