17-Mar-2016 written by : FSI-Team
A personal loan is one of the easier forms of personal finance to avail of, and can be used for myriad reasons, right from renovating your house to going on a long overdue vacation or to even make a purchase, be it white goods or anything else. They are also a good way to consolidate debt, if you want to avail of one loan to clear away several smaller dues that you may have, be it on credit cards or any other loan(s).
However, while easy to avail of no doubt, there are a few things you should keep in mind prior to filling in an application for a personal loan. Now that you have determined the reason as to why you need a personal loan, read on to know more about the hugely popular product.
A personal loan is nothing but an unsecured form of debt that is non-collateral backed, unlike say housing or auto loan. The factors that go into determining your eligibility for a personal loan, given its nature, are several, primary among which is your credit score. This becomes critical as the lender is taking a risk on the borrower’s ability and intention to repay the said loan, and having no collateral to back it up only increases the risk. Therefore is becomes important to CIBIL score check online before applying for a personal loan.
Like with any other loan that comes in installments, you would need to pay off your loan outstanding by way of an equated monthly installment or EMI.
That said; now let’s understand what all you need to know before you sign on the dotted line.
Documentation requirement – Being an unsecured loan product, most lenders require that the borrower demonstrate a stable job history, and may even have a minimum salary requirement as well. Documentation therefore typically includes salary proof (such as bank statements, Form 16) in addition to the standard identification and address proof documentation. Also, do check your personal loan eligibility before you apply for one.
Know the interest rate – Compare personal loan interest rates, before you do anything else. The reason is, rates on personal loans tend to be higher as they are unsecured loan products. Don’t just calculate the rate as-is, but know the annual percentage rate (APR) as well. This can save you a bundle in costs.
Know other fees, penalties and charges – When it comes to personal loans, there can be prepayment charges associated with it. Also, as with any other form of credit, things such as late payments attract not just late payment charges but also the taxes associated with it. Hence, read the fine print carefully and know what you are getting in to. Most lenders also attach prepayment charges to personal loans, which can hit you rather hard; depending upon the stage of repayment of the loan you are at.
Avoid gimmicks – To incentivise customers, some lenders offer seemingly attractive deals when you avail of a personal loan, such as an initial lower rate of interest, or even ease of documentation such as no credit bureau check etc. Before you approach such lenders, do take the time to carefully go through their product offering and ensure you are not signing up for something that will prove expensive in the long run.
Shop around – Before you commit yourself to a particular lender, do your homework. Shop around and look for the best deal out there. Consider all factors before you zero down on your loan provider. Not only will you save yourself some heartburn if you pick the right lender, but also a considerable amount of time and money in the long run.
Don’t overextend yourself – Often, it is tempting to avail of a higher amount simply because it is made available by the lender. Avoid succumbing to this, as you may just find yourself spiraling downward into a debt trap, as you will owe more than you had planned on or are able to comfortably repay. Hence consider the reason why you need the loan to begin with, and opt for just the correct amount.
Before you decide to avail of a personal loan it is a good idea to get your credit score evaluated. You can call for a copy of your credit report from any of the four credit bureaus in India, namely CIBIL, Equifax, Experian and CRIF High Mark. Your credit score plays a key role in determining whether your loan application will go through, and if it does the interest rate you are offered the loan at. Typically, a high credit score not only means the chances of your loan application going through are high, but it is also likely to be approved at the most competitive terms. Being finally fit therefore is critical and what better way to ensure that than by keeping regular track of your credit score?