Don’t Borrow Personal Loans Blindly; Consider These Factors First

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Are you a salaried employee or self-employed? Is your mailbox overflowing with messages offering you Personal Loan offers with very attractive terms?

It might mean that you have a good credit history and that banks and non-banking financial companies (NBFCs) are coming forward to offer you a Personal Loan. If you want to take thisloan, it is advisable to consider the pros and cons of such a loan. What are the factors that you need to consider before availing such a loan? How will you pick the right loan?  Hopefully, you will have answers to these questions after reading this article.

What is a Personal Loan?

A Personal Loan is an unsecured loan that helps you meet your current financial needs. You will have the flexibility to use the loan as per your discretion. You can use it for a vacation, home renovation, child’s education, business expansion, medical emergencies or any of your non-specific requirements. It is because of this flexibility; the Personal Loans are gaining popularity by the day. 

Advantages of a Personal Loan

  • The major advantage of a Personal Loan is the ability to use the loan for any requirement. This flexibility is not offered by most other types of loans like a Business Loan or a Home Loan.
  • The second reason is quick disbursal. Banks and NBFCs are using technology to make the process quicker and easier. 
  • The third reason that makes these loans attractive is the loans being unsecured. You do not require collateral to avail such loans. Also, when you avail a Personal Loan for renovating your house, you are eligible for an IT deduction up to Rs. 2,00,000. However, you will have to establish that you have used the loan only for a home renovation.

Disadvantages of a Personal Loan

If you do not carefully consider all the terms and conditions that are mentioned for Taking a Personal Loan from a particular bank, you may end up paying higher interest rate or prepayment penalty or other hidden charges.

Factors to consider before availing a Personal Loan

Access your total requirement

A Personal Loan is more expensive than other standard loans. So, do apply for the loan depending on your need but not on your eligibility. Your banker may try to lure you take a loan for the highest amount you are eligible for. Do not fall prey and pay more interest for the money that you don’t need.

Interest rate

Please evaluate carefully the rate of interest that is being charged for your Personal Loan.  While a flat interest rate may seem very less, and at times less than your home loan, it is misleading at a flat interest rate does not take into account the reduction in balance that happens with every instalment that you pay. So, if you are paying your loan in EMIs, a reasonable diminishing balance interest rate would be a good choice.

Access the total cost of your loan

The interest rate is the major cost component of your loan, but other costs in small print can give you heartburn if ignored. Processing fee, which is typically about 1 to 2 % of the loan amount should be taken into consideration. A prepayment penalty is one way that the banks ensure that you keep your loan for the full term and bear the full interest cost. So, if there is a possibility to repay the Personal Loan before the full term, consider a loan with a lower prepayment penalty. If you are running short of cash flows, late payment is also another factor to consider for your loan.

Evaluate your EMIs

These days, many stores are promoting their products with an attractive 0% EMI loans to promote sales. While on the surface the scheme seems very lucrative, we forget the fact that there is a huge string of processing fee attached to these schemes.  For example, you are considering buying a TV availing 0% EMI scheme. Let’s say, the cost of TV is Rs. 1,00,000 at 0% interest for six months by paying a processing charge of Rs. 4,000 then you have effectively paid more than 14% interest on the borrowed amount because you are paying interest of Rs.4000 upfront on Rs. 1,00,000 for 6 months. Another similar EMI pitch is the advance EMI. Here, you are asked to pay 1 or 2 EMIs in advance at the time of availing the loan. This would also work the same way as 0% EMI for lenders. So, beware of such schemes.

Verify Your CIBIL Score before Applying

If you are applying for a Personal Loan, the lending institutes like banks will evaluate your CIBIL score and income source before approving your loan. It is advisable to have a good understanding of your financial picture before applying for a Personal Loan or any other loan. If you have a good CIBIL score, you can shop and procure your loan at attractive terms.

Be vigilant against other add-ons

You may be offered additional products such as accident insurance and health insurance at “no additional cost”. The insurance payment for such a loan will get added to your EMI making it difficult to bear the instalment. So, avoid such add-ons.

Shop smart for lenders

When you are shopping around for a Personal Loan, look for a loan with attractive terms. ICICI Bank, HDFC Bank, Yes Bank, Standard Chartered bank and some of the banks that provide Personal Loans with attractive terms and conditions. You can also look at loans offered by other financial institutions like Capital First Personal Loans, Bajaj Finserv Personal Loans and Tata Capital Personal Loans.

Protect your credit history

Never actually apply for a loan to check the rates. Applying too many times for a loan can act against your credit history. The reason being, when you apply for a loan, the lending financial institution will access your credit score to analyse your ability to repay the loan. So, when you approach too many banks or lenders for your loan, the number of enquires for your CIBIL score will increase. This may picture you as a credit hungry person and will show the impact on your credit score. You can call the customer care of the bank and inquire about the terms and conditions of the loan which can be a tedious process if you are under a time crunch. The better way would be to go through an organisation that can provide you with the best offers based on the information that you have submitted. 

So, be wise when applying for a Personal Loan. Do not borrow Personal Loan blindly without considering all the factors stated above.