Many consider a personal loan to be a quick-fix solution whenever there is a financial emergency and ones’ savings are insufficient to meet the immediate requirement. Irrespective of the reason, you can avail a personal loan that comes with an attractive interest rate and flexible tenure. Here are the essential considerations that one must bear in mind before applying for a personal loan.
1. Why Do I Need a Personal Loan?
Have you already started making plans about how are you going to spend your cash? Give yourself a minute and think if you actually need a loan. If you are clear on the purpose of taking a loan, you will save yourself from borrowing more money than required and spending money on things you did not intend to.
2. Will I Qualify?
You have decided that you need money through a personal loan but have you thought about the chances of your loan getting approved? Before you apply for the loan, make a judgement of your financial activities and eligibility. Do you have a good credit score? Do you pay all utilities on time? Do you have a good monthly income? If you don’t have a good credit score or don’t meet the eligibility criteria, wait for some time before applying for a personal loan as even a failed application gets recorded in your credit report and can have a negative impact on your future applications.
3. How Much Will I Get?
Being an unsecured loan, the sanctioned personal loan amount would be affected by multiple factors such as your salary, existing liabilities (outstanding loan EMIs, credit card dues, etc.) as well as your current credit score. The usual personal loan amount that is extended to a borrower ranges between 50% and 60% of the person’s annual income.
4. How Much Can I Afford?
It is necessary to think about how much amount of loan you can afford to repay. Here’s how you can check the affordability:
- Analyse your monthly cash flow
- Figure out how much money you can dedicate to cover payments on a new debt
- Figure out if there is any money left with you after paying monthly bills and covering other expenses
- Explore areas where you can cut costs and save some money to add to the payment of monthly instalment
5. What All Documents Will I Need?
When you apply for a personal loan, the lender will ask your documents to verify your identity and your monthly cash flow. The basic documents required by the lender are:
- Identity proof: Aadhaar Card, Voter ID Card, Passport, Driving License
- Address proof: Utility Bills, Aadhaar Card, Passport, Ration Card
- Income proof: Bank account statement, salary slips, form 16, ITR
6. Can I Afford the interest Rate?
Most private banks will offer loans commensurate with a tenure ranging between 12-60 months, and interest rates that start at 10.25% per annum. The interest rate that you will get from a bank depends on various factors like your credit score, age, employer, repayment ability, etc. To know if you can afford the interest rate, it is necessary to have an estimate of your EMIs and you can calculate the EMIs by using Paisabazaar’s Personal Loan EMI Calculator.
7. What Are the Others Charges I should know about?
The following are some additional charges that can be applicable on a personal loan:
- Processing fees: When you are planning to take a personal loan, compare the processing fees charged by various banks. While some lending banks charge a flat processing fee upfront, other lending banks charge anything from 0.25% to 3.03% of the loan amount. At Paisabazaar, you can get a complete list of prospective lenders along with applicable processing fees, interest rates, etc. for various banks and NBFCs operating in India
- Late payment fees: Banks may also levy late payment fees in case you are late in EMI payments. Most banks charge 2% per month as the late payment penalty, however other charges may apply in case your post-dated check for the scheduled EMI payment is returned or an ECS transfer request fails as a result of insufficient funds in your account. Apart from such charges, these late payments show up on your credit report and adversely affect your credit score
- Prepayment fee/Part- payment fee: Many lenders offer the option of prepaying the loan but the criteria can differ. On one hand, some lenders will allow prepayment after a fixed lock-in period of 12 months while some will allow prepayment only in multiples of the EMI. You can even make a part- payment on your loan if the lender allows
Opting for a personal loan is completely your decision as you might face situations where loan can really help you out. One simple tip would be to read fine print and understand all the terms and conditions carefully.