7 Essential Tips For First-Time Personal Loan Applicants
Posted on Wednesday, February 28th, 2018 | By IndusInd Bank
Personal loans are unsecured loans, which do not require you to make any kind of security deposit while availing funds. At times, when you have an urgent requirement for finances, a personal loan is the best way to raise funds. With an extremely simple application process, which requires minimum documentation, a personal loan can give you the perfect financial boost to meet extra expenses or cover for unexpected emergency situations.
In addition to not backing your loan application with any collateral, you are also not required to state the reason behind applying for the loan. This means you could use the money for any purpose, depending upon your financial requirements. By providing you with immediate access to funds, personal loans allow you to focus on the more important aspects of life and help you achieve your dreams.
While the benefits of this scheme make it a popular financial solution, the decision to opt for a loan is a big one and must be made after carefully considering all aspects related to it. It is imperative, especially for a first-time applicant to acquire proper knowledge about the loan and also to understand one’s own financial requirements before taking any decision. The following tips could help a first-time applicant make a more informed decision when it comes to personal loans:
Assess Your Requirement
You must apply for a personal loan only after assessing your requirement for the same. It is advisable to opt out of taking a loan if you can somehow manage to meet your needs through more direct methods of payment. Since the loan is to be repaid through monthly instalments, it could be easy to get carried away by urges and desires to seek instant gratification and purchase things which you do not have sufficient funds for. However, you must carefully analyze your resources to determine whether you can regularly pay those instalments and try to avoid taking the loan to meet non-essential financial needs. It is a smart move to determine the amount of money you require in the present, if at all, and plan the repayment process judiciously
Know Your Credit Score
Your credit score is of utmost importance when it comes to applying for a personal loan. Your eligibility for a loan, the amount of loan that may be sanctioned to you, the interest rate, and the approval of your loan are largely dependent on your credit reports. A good score establishes creditworthiness which exponentially increases the chances of approval while existing repayment obligations adversely affect your application. You must keep a check on your credit score, and try to clear any pending dues in order to maintain a good score before applying for a loan. If you know your scores, you will have a rough idea about the amount of loan you are eligible for. Furthermore, you can verify this score and have any errors in the report rectified before applying, as it increases your chances of favourable terms.
Calculate Total Outflow
You must be aware of how much money you will spend over and above the loan amount you seek. In other words, you must calculate the total cost of taking a personal loan before applying for it. This cost includes the application fee and processing charges levied by various financial institutions, in addition to the interest rate you pay on the loan amount. Not only do these charges vary from one bank to another, some institutions might not levy additional charges at all. Comparing the offers from different institutions could help you determine where you are likely to save the maximum cost while taking a loan.
The repayment structure you choose could also have an impact on the total amount you spend on the loan. For example, lower EMIs over a longer tenure tend to be more expensive in the long run as you continue to pay interest on the amount for a greater period of time. To ensure that you optimize the benefits of this scheme, it is advisable to opt for larger EMIs and pay off the loan at the earliest.
Know the Additional Charges That Could Be Levied
It is advisable to understand the fine print of the terms of the loan and be informed of the situations which may attract additional charges. While there are several kinds of charges which could be imposed by different institutions, some of the common charges include –
• Late payment penalties – In case you fail to pay your EMIs on time and default more than once, you would be liable to pay penalties for late payment. A certain percentage is charged and added to your monthly EMIs as penalty.
• Pre-payment fee – You may choose to pay a part of the loan amount or clear the entire dues prior to the expiration of the contracted tenure. Pre-payment is not an option which every bank allows, and if they do, it might attract a fee which is a certain percentage of the outstanding loan amount
• Cheque Bounce Charges – Some banks might ask you to pay the penalty if the cheque towards your EMI is not honoured by the bank
Compare Interest Rates
When you approach any financial institution for a personal loan, they will make you a loan offer after thoroughly checking your credit score and repayment history. The interest rate on the loan amount is determined by your credit history, and to an extent, by the profile of your employer or the reputation of your place of work. A stable income and good creditworthiness will ensure a lower rate of interest. You must invite loan offers from as many institutions as possible in order to be in a position to negotiate the best deal and get yourself the lowest possible interest rate.
Plan Your Repayment Structure
You are required to repay the loan amount over a period of time, in fixed monthly instalments or Equated Monthly Instalments (EMIs). Your EMIs are based on the loan tenure and are calculated according to the interest rates on your loan amount. This tenure is flexible and determined by you according to your convenience. A shorter tenure attracts higher monthly EMIs, and the EMIs reduce as the tenure is increased. Since you get to choose the tenure and the corresponding EMI, it is imperative to be sure of your resources and have plans in place to make those regular payments.
If you make some extra money, be it through an increased salary, a bonus or gains from an investment, it is prudent to use it to make prepayments against your loan. Making prepayments reduces the tenure of the loan and the lesser the tenure of an outstanding loan, the lower is the rate of interest it attracts.
Follow-up on the Application Process
After having narrowed in on the financial institution of preference, you must contact them to intimate yourself of the documentation required to apply. Though basic paperwork regarding identity proof and address proof remains the same, other requirements vary in different institutions. Applying correctly is of utmost importance because loans can be rejected based on incomplete paperwork.