Planning to Apply for Personal Loan? Here are the most important things to know before doing so.
When low on funds and faced with urgent expenses, a personal loan is a go-to option for many. Regardless of whether you are faced with an emergency expense or not, acquiring a personal loan carries with it a financial commitment. Before taking the plunge and acquiring a personal loan for yourself, here are a few things to consider.
Purpose of personal loan:
Personal loans do not have a specific purpose and can be used for any purpose such as meeting miscellaneous expenses, for wedding expenses, and even for consolidating various outstanding lines of credit. The versatility of a personal loan is what makes it so popular but keep in mind that it can’t fit the bill for every expense. If the expense is not too pressing, you could just save up for it. Larger expenses would be served better if you were to refinance your home.
Personal Loan Eligibility
The primary eligibility criteria to get a personal loan is your credit score. Your financial behaviour is consolidated to a score which considers your timely repayment of credit card bills, previous loan instalments, frequency of transactions with your bank account, etc.
Most personal loans are unsecured Loans and does not require a guarantor or any collateral to be put up. Your annual income, age, and nature of employment also play important factors in determining your eligibility for Personal loan.
The interest Rates of a Personal Loan
The interest rates of a personal loan differ across the banks. They can range from 4% p.a. to 14% p.a. You have to carefully choose the bank where you seek the personal loan from based on the interest rates offered. Choose the lowest interest rate so that your monthly instalment will be less.
Some banks calculate the interest rate not on the remaining balance but on the opening balance of the loan account. Also, choose a shorter loan tenure to save on interest, if you can afford the monthly instalment.
What fees and charges are applicable?
It may so happen that the loan amount you get in hand is something lesser than the amount you have applied for. You may wonder why. The answer is fees and charges are deducted from your loan amount. Some loans carry an early settlement fee when you repay your loan before the tenure attains maturity. In addition, some loans require an insurance cover which can increase the overall cost of the loan due to premiums paid. The other fees and charges that you must consider when weighing the affordability of the loan are processing fees, stamp duty, late payment fees, etc.
Monthly Personal Loan Repayments:
Looking at instalments from an interest rate point of view, it is good to repay the loan in a short period. Shorter tenures come with higher instalments but it also means you pay lesser interest throughout the duration of the loan. You need to take into account your monthly expenses and commitments before settling on the monthly instalment amount. Do not choose a tenure that results in an instalment amount way out of your monthly budget. Choose your tenure based on the instalment amount you are capable of repaying.
Personal loans offer you versatility in terms of how it can be used and carries its own set of advantages but if not used effectively, they can snowball out of control and become a bigger strain on your finances.