Last Updated on 21/02/2019 by Deepak Singla
Personal loans are extremely useful, especially if you need immediate financing. These are general purpose loans, and you can use them for an array of financial requirements. The loan can be directed towards giving your home a makeover or paying for your dream wedding.
However, there are certain things you should keep in mind before apply for a loan. After all, it’s borrowed money and you should have a plan on how to pay it off.
Below are some factors you should consider before you take a personal loan.
Purpose of the Loan
It’s important to know why you require a personal loan. This type of loan has limited restrictions, unlike home loans or car loans. That’s why you can consolidate your credit card’s outstanding balance and pay off the dues easily. You can also use it to pay off medical bills that aren’t covered by your insurance. Its uses also extend to financing your home renovation, planning your own wedding, or attending to other financial emergencies.
Although, you can’t use a personal loan for everything. For instance, you’d rather settle for a car loan to purchase a vehicle. This is because the terms offered by the lender are better in comparison. Similarly, avoid using your personal loan for investments in stocks and shares. The returns aren’t definite in nature and there are chances of experiencing a loss.
Interest Rates and Other Fees
One of the most important factors you need to consider is the interest rate. Qualifying for the best rates requires a stellar credit score as well as history.
You can start your search by comparing different loans in the market and their advertised interest rates. If your credit score and history is above average, chances are you will receive a great deal from your potential lender.
Besides interest rates, you should also consider other fees that are associated with a personal loan. Establishment and servicing fees, which are charged by the bank to make the product available to you, are examples of additional charges.
Your payment behaviour also affects the other charges that may be applied to the loan. If you’ve delayed your monthly instalment payment, you may be charged late fees. Exiting a loan before the tenure ends incurs early exit or withdrawal fees. Similarly, if you close the loan before the repayment period, you may have to pay withdrawal fees.
Another factor that you need to consider is the tenure of a personal loan. This type of financial product come with a short and fixed time period, usually in multiples of 12 (months).
Longer repayment periods equals to lower monthly instalments. However, the longer your repayment period, the more interest you may incur on your personal loan.
It’s important to choose a tenure that works in your favour. For instance, opt for a shorter tenure if you’re using a personal loan to travel to your dream destination. However, if it’s for an expensive medical emergency, you can choose a longer tenure.
Your credit history determines whether your loan will receive the green light or not. Banks scour through your report, looking at your current outstanding balances and your repayment history. Your eligibility for the loan is based on your ability to pay off the dues on time.
If you’re in debt or have been inconsistent with your payments, it takes a hit on your credit score. Before you apply for any financial product, it’s advised to check your score and history. There are many legitimate sources online that will give you this information.
If your score is low, try and improve it by paying all your dues on time. You can also reduce the number of financial products you have across your name. Remember, it takes some time for these new changes to reflect in your report and modify your credit score.
Once you have selected your loan, you need to check out how to apply for it. Most banks offer an online application option. For this, you have to upload the required documents and enter your details in the application form before submitting it. If you don’t prefer applying online, you can also visit the bank and meet a representative who will carry out the application.
You also need to be clear on the documents that are required for your application. Most banks require identity proof, income proof, and account details, along with the filled-in application form. The income proof documents usually vary for salaried and non-salaried individuals.
The factors given above would help you zero down on the perfect loan.
At the end of the day, you need to be comfortable with the loan you choose. Always check your options on comparison websites or use comparison tools. Your research will guide you and help you zero in on the right personal loan.