Emergencies, especially financial emergencies, can occur anytime, which is why our elders have always asked us to keep a rainy day amount in our banks. But sometimes the emergencies can be so big that the amount saved up isn’t enough. But thanks to credit cards and personal loans, all your monetary requirements.
Personal loans are unsecured loans, but they have a huge advantage, and that is they can be used for anything, unlike other loans. But that’s not it; with the case of personal loans, the loan taker doesn’t have to pledge anything as collateral. If you plan to take personal loans, you need to keep some dos and Don’ts you need to keep in mind before you apply for personal loans.
Before you sign up for a personal loan, understand why you are getting a personal loan:
Unlike any other loans or even credit cards, which are designed in such a manner that you can meet a specific requirement, personal loans are taken for meeting all sorts of financial needs. Two reasons for getting a personal loan are:
- Repayment of a debt
- Funding requirements
People believe that using personal loans to get out of debt is useless, it isn’t. The average interest rate of credit cards is 25% per annum, and the average interest rate of a personal loan is 10.99 % which is way less than the credit card and more manageable than a credit card.
Now let’s take a look at the Do’s and Don’ts that you need to keep in mind before investing in a personal loan.
Go for lower interest rates
One significant rule you need to follow when applying for personal loans clarifies why you need them. This way, the repayment schedule can be made, and you can stick to the repayment schedule and pay of the debt.
Look out for promotion
If you are opting for a personal loan at an aggregator website that you can get access to a lot of offers like better rates, discounts, etc., mind you! These offers are available on the bank’s website. Aggregator websites also have a plus point that you can compare the rates and then settle for the best option for you and the one you are eligible for.
Always make a comparison
The biggest mistake that people make while taking loans is not comparing their options. Every bank and loan lending institution has the power of lending personal loans. But their processing rates, interest rates and various other rates vary from company to company. So make a comparison preferable at a finance website and choose the perfect one for you.
Keep your eligibility criteria in mind
The eligibility criteria will be different for every individual and also will vary from lending company/bank. For example: in some cases, the lender companies would want you to have a monthly income of say 25000 rupees etc. it is better to be aware of their criteria and then apply.
Be aware of your Credit score
The lending companies always provide the best of the best offers for individuals with the highest credit scores. The credit score depends upon the maintenance of credit history, which is maintained based on repayment of previous loans, paying credit card bills on time etc.
So whenever you are applying for a personal loan, always get your free credit score and check for your eligibility and standing.
Keep a lookout for the fine print
Reading the fine print is very important, especially before signing on the papers of your loan. Always read the crucial details like the maximum loan tenure, income cut off, repayment schedule, and the timeline of the loan approval.
Take care of the processing fees
In some cases, the lender will offer low interest rates but cover it up with high processing fees.
Don’t get greedy
By greedy, I mean don’t borrow more than you require. No matter what your eligibility criteria are, you should always calculate your requirement and then proceed. Let’s say, with your credentials and a good credit score, you can quickly get a pre-approved personal loan worth ten lakhs, but you right now require three lakhs.
The ten lakhs make it look inciting, but returning them can be a huge task, and you might end up spoiling your credit score. So always take the amount you require, nothing more.
Calculate the EMI before proceeding
Whenever you are applying for a personal loan, calculate the emi with the help of an online calculator. Ensure that you are comfortable with the EMI, and all the EMI’s in totality take up around 30 to 40 % of your income. If you end up going over that, you will end up being in a financial crisis.
Don’t compare the loans solely based on interest rate
Not denying the fact that the loan’s interest rate isn’t critical, but neglecting other charges like pre-closure charges, prepayment charges, processing fees etc., is not good as these charges will also impact the margins later on.
Remember that a personal loan is a short term loan, which should be repaid in five years and within these five years, your pay can increase, and you may be in a position to pay back the loan earlier, so the prepayment charges shouldn’t be so high, that you end up burning a hole in your pocket.
Don’t apply at gazillion places at once
It is understandable that whenever we need money, we end up knocking at every door, in our case, applying for loans at multiple lenders. Sadly, when you apply to lenders, your credit score is checked, which invariably reduces the credit score marginally.
In simpler terms, the more you apply, the lower your credit score will get, which in return will lower your eligibility for loans or increase the interest rate.
Missing or skipping loan repayments? It’s a big no-no.
Applying for a loan will not impact your credit score (on a large scale). Not paying them on time will harm your credit score terribly. Once you have a bad credit score, the chances of you getting another loan will become problematic.
So before you sign up for the loan, take a look at the monthly repayment, confirm it and see if you can afford the repayment every month. If you are unable to do so, either extend the loan period or reduce the loan amount.
Please don’t spend your loan on non-essential expenditures.
Though personal loans are helpful and the interest rates are super low, don’t get it because you can afford them. And please don’t use it for completing your whims and fancies.
Before you opt for a personal loan, take a look at your spending habits. Though personal loans will help you get out of financial emergencies, there will be a financial burden for the next 50 to ten years. You will need to have a good repayment schedule, and you will have to be on the top of your game.