Need a personal loan? Important things to consider first


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personal loan

Have you noticed it is not uncommon to find at least one e-mail per day about instant or pre-approved personal loans in your mailbox? This not so usual but lucrative terminology can surely make you wonder that the particular offer has specifically been customized and curated for you, and you should grab it. But wait, do not fall for it and hit the apply for “instant personal loan”.

Whether you need to consolidate credit card debt, cover unexpected expenses- medical, travel for a family emergency, or personal events, a personal loan can help. It is quick, usually doesn’t need collateral against the amount, and can be sanctioned to you after you fulfil the edibility laid down by the lenders. Though most loan apps such as Mpokket don’t require any physical documents from you, the amount you can borrow from them is up to Rs. 30,000. If your requirement is more, you have to narrow down the lender which suits your borrowing needs. But before you do so, here is the list of important things you should consider before applying for the plan. 

Interest rates: The interest rate on a personal loan is usually in the range of 8-16 percent, depending on your credit score. Always check and compare the interest rates of the various lenders before narrowing them down to one. For example, if you are charged a high rate of interest, your total interest outgo will be more, thus causing you to use up most of your income or salary in repaying the debt. And do assess the other charges such as processing fees prepayment charges while selecting the lender. 

While you are on it, also check whether the interest offered is at a flat interest rate or reducing balance rates. In laymen’s terms, the monthly interest rate in the case of flat-rate loans remains the same for the entire duration of the tenure. While in the case of reducing balance loans, if the principal amount decreases, then the interest decreases as & when the principal is paid. 

Time taken for loan disbursal: If you need a personal loan at the time of emergency, then the time taken by the lender will concern you the most. In such a case, waiting for days(weeks in some cases) to get your application approved and then the amount disbursed will not serve you any purpose. Hence, before narrowing down the lender, check the time taken for loan disbursal, which can easily be done on the bank’s loan apps. If the disbursal time is more, then apps like Mpokket will give you an instant loan against minimal documentation. 

Repayment capacity: Before availing of a personal loan, it is imperative to ask yourself whether you will be able to repay the personal loan EMI on time or not. Repayment profiling is also conducted by banks, loan apps, or lenders. You will be chosen at the end by evaluating your income sources and the loan amount you require before granting the said amount to you. But you can also do so on your own: review your monthly budget to see how much extra payment you can sideline for loan repayment; you can thereby decide whether you should get a long-term loan which will add more interest or get a short term loan with high monthly take out. 

Check your eligibility:  Before you visit the bank for availing a personal loan,  you can save a lot of your time by checking whether you are eligible for it or not. Most of the loan apps and bank websites have their loan eligibility calculator, which can help you deduce the loan amount, loan tenure, and the interest rate you will get the loan at. Remember, the amount you can borrow depends on your current income(including from other sources), repaying capacity, credit score, etc. These are the basic things lender checks before sanctioning you a loan amount. Depending upon your credit score and loan requirement, the financial institution can also ask for other information as well. In case you are a student, then your options in India are quite limited. Through Mpokket, even the students can avail of a personal loan against their college ID and KYC documents.

Prepayment penalties: If this is your first time availing loan, then you should know lenders generally charge a fee(Prepayment) if you pay off your loan early. It is because early repayment by you prevents banks or financial institutions from earning the interest as they had expected to take from you. Hence, narrow down the lender who charges nil or low foreclose charges. For example, Mpokket encourages the individual to pay off early and allows them to earn mCoins to help them in their repayment. 

Check your credit score: One of the first things you should do is obtain your CIBIL report. It informs a bank or lending institution about your creditworthiness. If your credit score is between 750-900, it is considered to be great and increases your chances of your loan application getting approved. Moreover, it also means you will get more attractive loan offers, including, but not limited to, low-interest rates, long repayment periods, higher loan amounts, etc.

Most of the loan apps today offer free CIBIL scores where you do so. If your credit score is low & the need for a personal loan is not urgent, then take appropriate measures to quickly improve your credit score. Some of the measures you can take: pay down credit card balances, do not apply for a new credit card.

Assess your Debt-to-income-ratio (DTI):  It measures how much debt you are carrying relative to your income. It shows your ability to pay your debt instalments easily. The lower your DTI is, the more attractive you are to lenders, and the higher the ratio creates financial stress of repayment as well as lowers your credit score. Here is a quick & easy way to calculate your DTI, divide your total recurring monthly debt (credit cards, home loan, student loan, and so on) by your gross monthly income. 

A personal loan will surely come in handy when you find yourself in need of funds for fulfilling some of your need/s. A personal loan in India, at the end of the day, is an unsecured loan; that is, the interest rate on this is comparatively higher than the secured one. Hence, carefully decide how much do you need and try not to borrow more than that. After all, it will be you only who will have to bear the burden of exorbitant interest rates. Lastly, consider all additional costs before choosing the particular lender. Several other costs get added into the overall cost, such as processing fees, prepayment charges, late payment charges, etc. Ensure you read the terms & conditions properly before signing the document. 


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