Debt has become an inextricable element of an ordinary person’s life. With rising prices of houses, automobiles, education, consumer durables, and other items, it is nearly impossible for an average working person to avoid taking out loans.
Access to a loan is much easier today than it was a decade ago, thanks to advances in the FinTech space. Many major banks and non-banking financial companies (NBFCs) now offer instant personal loans for various purposes. The main benefit of taking out a loan online is that you may get ready-to-use funds instantly from your own home. Furthermore, comparing multiple lenders has become quick and straightforward.
On a related note, one must realize that while reaching life objectives and accomplishing money goals are essential, immediate gratification is not. As a result, if you are a potential borrower, consider whether and why you require the funds and how much of it can be obtained from other sources to reduce your debt burden.
To avoid taking on the wrong kind of loan and an unbearable financial load, follow these ten golden tips before applying for one.
Follow These 10 Golden Rules while Taking a Personal Loan
Do Comprehensive Research before Applying
Most consumers do not examine and compare the many available loan possibilities; instead, they grab the first loan that comes their way when the need arises. Before applying for a loan, properly investigate all of your choices because loans are typically long-term commitments.
Going at them wisely will help you avoid future financial difficulties. If you want to repair your home, for example, instead of taking out a personal loan, look into refinancing your home loan because it typically has a cheaper interest rate.
Once you have made up your mind on the type of loan that is suitable for you, it’s a good idea to compare interest rates from several banks and non-banking financial companies (NBFCs). Keep in mind that a slight change in the interest rate can significantly impact the total loan cost. Therefore, a low-interest personal loan will considerably lessen your burden. Aside from the interest rate, compare the processing fee, foreclosure fees, etc.
Don’t Take on Too Many Debts
Technology has altered the entire credit ecosystem, making it easier for customers to obtain personal loans. However, taking a loan without any special needs or taking an excessive loan is not a good idea. The loan type determines your EMI. Taken on credit only to the tune that you can comfortably repay. One crucial financial idea is that a personal loan should equal 10% of your monthly payments so that you should have enough cash left after paying the EMI to cover your monthly expenses.
Before You Apply, Check Your Credit Score
A credit score determines your creditworthiness. The lender checks your credit score to see whether you have a good enough credit score to qualify when you apply for a loan.
Apart from determining loan acceptance or rejection, a credit score is significant in deciding whether you get a cheaper interest rate. If you have an excellent loan payback history with an exceptional credit score, lenders are more likely to issue you loans because your profile is less dangerous.
If your credit score isn’t high enough to qualify for a loan or you want a loan with a lower interest rate, you should first focus on increasing your credit score. You may get your credit score directly from the credit bureaus or from one of the many websites that offer free credit score checks.
Pay Off the Loan as Soon as Feasible and Keep the Term as Short as Possible
Late payments are considered indisciplined, and they negatively impact your CIBIL score and attract penalties. In addition, it tarnishes the customer’s credit and makes borrowing more difficult in the future. As a result, always pay the EMI on time. Long lengths of time are always enticing because they reduce the size of the EMIs. However, the customer ends up paying the lender more in such a scenario. The EMI is higher when the term is short, but it is paid quickly, and you pay less in the form of interest.
When Taking Out a Hefty Loan, It’s Always a Good Idea to have Insurance.
It is critical to obtain loan protection insurance when the loan amount is significant. This kind of insurance protects the interests of the client’s family if the customer defaults on the loan. In addition, many loan insurance policies cover job loss, accidents, permanent and temporary disability, and even death; the insurer pays the remaining EMIs if any of these unfortunate events occur.
Negotiate Loan Terms
The longer the loan term, the more interest you must pay. Therefore, it’s good to keep the loan term as short as possible to get out of debt faster. However, if that isn’t an option, consider negotiating favorable loan terms with the lender, especially if you have a high credit score.
Do not use a Personal Loan to Invest.
Personal loans have a higher interest rate than secured loans because they are unsecured. In addition, it will be difficult to pay EMI if the personal loan is utilized for investment purposes where there is no certainty of profit (for instance, stock market investments). Therefore, investing with a personal loan is not recommended.
Read the Terms and Conditions before Proceeding.
The consumer must sign a loan agreement for any form of a loan. Unfortunately, many people sign it without reading all of the terms. However, every consumer must comprehend the importance of the agreement, which contains the loan’s terms and conditions. Failure to read and understand the deal thoroughly can result in a slew of problems, and you may be surprised by unexpected costs in the future.
Whenever Possible, Pay in Advance.
Save money in every way you can. You can repay the loan early using the money you have saved. People often receive unexpected funds in the form of bonuses, incentives, and wage raises, which they can deposit and use to return their personal loans in advance.
Paying up your loan early will save you a lot of money on the interest that would have been paid to the lender over the loan’s term. You will be debt-free due to this, and the money that would have been used to repay the loan will be put to better use.
Before You Take Out a Personal Loan, Figure Out Your EMI.
Many websites now feature EMI calculators that allow you to calculate your EMI in a few clicks. The future amount payable will be apparent in front of you if you calculate EMI in advance. Then, when loan repayment begins, you will know how this will influence your monthly budget.
When you want to enhance your credit score, repair your credit history, need money in an emergency, or want to cover a gap in your down payment, taking on a debt in the form of a loan might be beneficial. Ensure that you make an informed decision.