Though it is best advisable to avoid taking debt, many people seek loans for personal reasons. This may be either to consolidate their debts under one roof or pay for sudden medical expenses or meet unforeseen expenditures. Many financial institutions advertise their loan products, thus, encouraging potential customers to borrow at attractive interest rates. Seemingly uncomplicated in approach, taking a loan and then repaying it can be an uphill task.
Taking a personal loan involves certain necessary considerations. Keeping them in mind will ensure smooth loan processing and hassle-free loan repayment. These include:
- Decide the right loan amount: More loan implies more payoffs as interests in the long run. This implies increased liability and repaying an amount much bigger than the loan taken. The ideal way is to borrow only the essential amount while finding alternative ways to fund the rest. The loan amount may be as low as Rs. 50, 000 to as high as Rs. 10 lakhs.
- Compare interest rates: With a volley of financial institutions opening to the idea of granting personal loans to their customers, intended borrowers can benefit from the availability of a wide range of interest rates. Customers may also choose to repay loans on a flat interest basis or reducing balance method.Flat interest rates are mostly low, thus, deceiving the customers into estimated with the use of the online Personal Loan Interest Rate Calculator. believing that they would have to pay less. The right amount of interest can be.
Many customers complain of high-interest rates on personal loans sought from NBFCs. This is because most of these loans are unsecured, thus, requiring their customers to produce no collateral in lieu of the loans taken.
- Maintaining your credit score: Many people are unaware of the credit score concept and its determining effect on interest rates. One can check for free Credit Score from time to time by logging to sites that monitor it using personal details. The Credit Score value details one’s credit history, the amount of loan taken to date in addition to repayment of the same. Lower credit score implies the risk of default and, hence, the imposition of high-interest charges on the loan applied for.
- Repayment period: Avoid spreading your loan repayment over a lengthy tenure. Low EMIs over prolonged periods is a deceptive concept that ultimately results in shelling out more money as interest. Though it may involve high installment payment, it is ideal to keep the repayment period as short as possible. This way, you will be sure of ridding yourself of the loan liability within a short period.
- Prepayment option: Check if your lender allows you to prepay the loan. In certain instances of sudden windfall, many people make the folly of investing the extra money earned in government securities to earn interest while continuing to repay their loans. The interest earned on government deposits is much lesser than the interest amount one must pay on personal loans. Any extra money earned must be used towards the quick repayment of the loans. Though premature repayment of loans involves no added charges as mandated by the Reserve Bank of India, many financial institutions charge a nominal prepayment charge citing an additional cost on foreclosure. Find out the charges charged by all potential lenders and borrow accordingly.
- Loan disbursement period: This is a tricky concept as most financial institutions take a similar time to disburse the payment. However, many payday loan companies promise instant payment online citing interest rates as low as 0.5-1 percent per day. Annualizing these interest rates reveal a whopping 365 percent interest on the loan taken. So, while you must opt for a lending institution for timely loan disbursement, we must take care to avoid fancy marketing gimmicks of immediate disbursement that come at exorbitant interest rates.
- Avoid add-on charges: Lending institutions always find a way to levy extra charges. These may include loan processing fees, EMI bounce charges, penalties on late payment and online convenience secure fees to grant online access to the loan account with a unique ID and password. Some of them even go to the extent to buy insurance in lieu of the loan applied for. This results in increased EMI payment as the insurance premium gets added to the installment payable every month. Avoid taking loans from such financial institutions.
- Simplicity of the loan process: Eligibility for a loan need not necessarily mean that the financial institutions would adopt a simple process to disburse the loan. Prefer a NBFC that lends a patient ear to your requirements and avails loan agreement. Ideally, borrowers are required to fill the loan application forms and submit documents along with pay slips and previous years’ income tax declarations. Simplicity matters and must be considered while seeking loans.