A personal loan is today a readily available source of money for people looking to bridge the gap between income and expenses. With tempting pre-approved loans being offered by several banks and financial institutions, it is quite easy to get caught in a costly debt-trap if one is not alert enough to carefully scrutinize lucrative deals.
Personal loans are a boon, especially to fund medical expenses or other pressing short-term contingencies that cannot be addressed by other regular loan products. There are, however, few key points that you need to note before applying for a personal loan.
Personal loans don’t need collateral. Simply means that you would not need to pledge your property or other investment papers to get the loan; Hence no risk of losing property if at all you delay or default on repayments.
This is precisely why personal loans are costly and are offered only to people who will be able to repay the loan in a timely manner.
High Interest Rates
When compared other regular loan products, personal loans attract higher interest rates to cover the risks of lending without collateral. Personal loans are available at Fixed/ Flat interest rates or Reducing Balance Rates. Interest rates offered by lenders are competitive but do not vary drastically.
The interest rate in India is as low as 10.99% to 24% per annum depending on the different factors of the loan borrower. Usually the interest rate is determined on the credit history, applicant’s annual income, credit score, relationship with the bank, stability of the income, debt to income ratio and negotiation skills.
Fixed interest rates may seem lower, but paying a flat interest throughout the tenure of the loan may work out paying up a lot more than you borrowed. Variable interest rates are higher as they apply to the outstanding loan amount; however they too are bound to be revised regularly. It definitely pays to do the math!
Loan Amount, Tenure and EMIs
Take a personal loan only if necessary and after ascertaining that you can in fact afford to repay the EMIs throughout the tenure of the loan. Take stock of your requirements and decide on the loan amount.
While it may be tempting to avail a larger loan it is important to focus on your capacity of settle the loan in a timely manner. The norm is to ensure that your EMI is less than 50% of your monthly income so that you have enough funds for regular expenses.
Cost of Borrowing
Each loan has a price tag! There are several costs associated with a personal loan. Even if the interest rates are attractive, you’ll have to ascertain the total costs you are bound to incur when availing a personal loan. Standard charges include:
- Loan Processing Fee: Lenders usually charge a flat fee for processing the loan. In some cases a fixed 1-2% of the loan amount is charged as processing fees. Higher the loan amount, greater the fee is such cases.
- Penalty for late EMIs: There is also a penalty charged on delayed payment of EMI. Every time you miss the EMI schedule, you pay a tad extra.
- Pre-payment penalty: Be it partial payments or foreclosures, paying up a personal loan ahead of the scheduled due date attracts a penalty, which in some cases tends to be heavy. Make sure of what it will cost you to get out of the debt, if at all you have a chance to make a bulk down payment.
Some lenders totally waive pre-payment charges if the loan amount is small. For example, IDFC First Bank Personal Loan upto Rs.20, 000 is exempt from pre-payment penalty, making it ideal for sudden expenses and you can repay the loan as soon as possible without paying extra charges.
Your CIBIL/Credit score is an important factor that determines loan approval. The credit score and history reveal how systematically you have paid up EMIs for loans you have already availed, including your credit card dues as well.
Every time you pay your EMI, credit card bill on time your score goes up, but if you delay payments the score goes down. As these scores reflect your commitment to paying back the loan in a timely manner, lenders will be more than willing to approve your loan application.
At the time of Loan approval, your minimum CIBIL Score should be 750. A person having a score more than that, is considered trustworthy and responsible when it comes to repaying their loan amount. So always check your CIBIL Score before applying for a loan. Also, if your CIBIL Score is above 750, you can bargain with the bank for lower interest rates.
A personal loan is offered solely based on a borrowers potential to settle the debt.
Apart from a solid credit history and score, proof of stable monthly income, address and employment are important eligibility criteria for a personal loan. Age and occupation of the applicant are also considered when processing the application.
The person should be minimum 21 years of age with a CIBIL Score of or more than 750. Also, higher and more stable the repayment capacity increases your eligibility of getting the loan. Other factors that determine your eligibility is your geographic location, housing situation, existing credit, the company in which you work and credit history.
It is important to note that the loan amount sanctioned tends to vary based on your occupation and income. Some lenders may even cap the personal loan amount, even if the borrower’s income is far more than that specified in the eligibility criteria.
You can only borrow a certain sum of money through a personal loan. It is better to estimate your needs and ascertain if a personal loan is suitable for you.
The loan amount is typically credited to your bank account once the loan is approved. EMI payments may be deducted automatically or accepted via cheques.
Check the pre-requisites carefully. For instance, the IDFC Bank First Personal Loan is available only to applicants with net banking accounts in select banks such as SBI, HDFC, Axis, ICICI and Yes Bank.
Disbursal time is also important if you require funds urgently.
Add-Ons and Perks
Borrowing more than what you actually need will prove to be a financial overhead that you may not be able to get rid of any time soon.
Free insurance, credit cards and other perks offered with a personal loan may not be really useful. Evaluate the loan offer carefully and select a no-frills offer that best meets your requirements.
Let the personal loan be your last choice – one that you’ll make when there are no other alternate sources of funds. Check out other relatively long-term loan products, which in most cases are likely to be secured loans. Request friends / relatives for a low-interest or even a zero interest loan if you think its fine.
Online applications and speedy processing, minimum documentation, low interest rates, instant approval and disbursal, perks and free gifts, and a host of other features make personal loans more appealing. However, borrow only if required and what is necessary to keep debt woes at bay!