Be it a financial emergency or a big ticket purchase, more and more people are resorting to personal loans for quick and easy access to fund their current financial needs. Personal loans are a cheaper form of credit than a credit card and unlike other secured loans like home or auto, personal loans are unsecured loans and do not require any collateral.
Personal loans can be taken to fund situations such as a medical emergency, reducing a high-interest debt, wedding in the family, child’s education, home improvement, a leisure holiday, big-ticket purchases such as household equipment or gadgets etc. Personal loans can be taken for a variety of reasons and for each person the reason to avail a personal loan can be different. Thus, you may avail a personal loan to fund your current financial needs with the potential future; however, there are few things which everyone needs to keep in mind before applying for a personal loan.
The top 4 things you should keep in mind while opting for your first ever Personal Loans:
Credit score and previous credit history
Before processing your loan application form, the lending institution will look at your credit score and previous credit history. The terms and conditions of your personal loan are completely dependent on your credit score as there is no collateral involved. A poor credit score would result in rejection of loan application or loans given on unfavorable terms and conditions. Thus, before applying for a personal loan ensure that you clear all the dues on your credit card and any other outstanding dues.
Negotiate for the best Interest Rate and Loan offers
One of the most crucial factors which you must keep in mind while opting for a personal loan is the cost involved. Banks and other financial institutions too are competing with each other to increase their customer base. If you have a good credit score then you must not settle for the first offer that comes your way. You must negotiate on the interest rate, as even a slight difference in the interest rate can reduce your repayment amount significantly. Apart from the interest rate, you should also look at other charges involved such as processing fees and other charges. Many a time, lenders offer you lower interest rate but compensate the same with higher processing fees. Thus, the overall cost of loans, loan tenure and repayment schedule should be evaluated before finalizing your personal loan. There are many players in the market with excellent offers and you must look around for the best offer.
Penalty in case of delays or default in loan repayment
Delays or defaults in repayment of your personal loans can have serious long-term implications. It could happen that you may delay and default on your EMI either intentionally or unintentionally. Not only such delays and defaults attract severe penalty charges but also impact your credit score permanently. Even after you service the dues along with the penalty charges, the default will always reflect in your credit history severely affecting your future access to loans in life. Therefore, you must never delay or default on your loan repayment.
Consider your overall financial situation
Personal loans are unavoidable in case of an emergency and can help you immensely in case of any such pressing financial needs. However, if you are taking up a personal loan to finance a leisure expense then you must consider your overall financial condition. Though cheaper than credit cards, these are loans which need to be serviced in future. Personal loans give you the ability to access a large amount of money, but they have shorter repayment tenure and higher interest rate resulting in the monthly repayment amount being substantially high. A higher EMI could severely affect your finances in future as it would be deducted from your salary every month. There is no harm in taking a personal loan if you have a stable income but if you do not have clarity of future income, it would be wiser to save up and spend in future.