Personal loans can be an option for individuals who are in situations that require urgent capital. These loans are usually unsecured, which means that the lender does not request any form of security or collateral against the loan. Therefore, they can provide a quick solution for emergencies or unexpected expenses. However, applying for a personal loan without planning may result in future financial strain. This article highlights the things one should remember before applying for an instant personal loan.
1. Understand Your Financial Needs
Before applying, you should be clear about how you plan to use the loan amount.
Avoid borrowing more than you need. This is because borrowing in excess might be convenient in the short run, however, you have to repay the entire amount back with interest. Therefore, determining the needed loan amount, be it for medical bills, a vacation, household bills, or a school payment, is important.
2. Know Your Repayment Ability
Repayment is a long-term commitment. Lenders provide repayment terms between 12 to 60 months. Select a tenure that suits your monthly earnings.
You can calculate how much you have to pay as monthly instalments using a personal loan EMI calculator. You can use this tool to align your EMI with your monthly expenses and avoid the loan repayment from exceeding your budget.
3. Check the Interest Rate
Interest rates differ among various lenders. Your income level, job stability, and credit score can further affect the interest rate of the loan offer by a lender.
Always compare the annual percentage rate (APR) and not the nominal interest rate. APR takes into account all the other fees and provides you with the actual cost of borrowing. The interest rate difference, however small, makes a significant difference in the long run.
4. Know the Processing Charges and Additional Fees
Applicants should not only consider the loan amount and its interest rate but also the processing and other fees. This is because some other fees can increase the total cost of the loan.
They include:
- Processing fee.
- Late payment penalty
- Prepayment or foreclosure fees
- GST and documentation charges
These fees will add to the overall cost of the loan. Therefore, borrowers must carefully read the terms and conditions prior to signing the agreement.
5. Track Your Credit Score
Your credit score highlights your past credit transactions. Lenders check your score before approving loans to assess your repayment ability.
- A score of more than 750 is typically considered favourable.
- A low score may lead to higher interest rates or even rejection.
If your credit score is low, you can improve it by clearing dues and having a timely repayment record prior to applying.
6. Provide Required Documents and Information
While applying for a personal loan, you have to provide personal and financial documents such as the following:
- PAN card and Aadhaar card.
- Salary slips or proof of income.
- Bank statements.
- Employment details.
Ensure that the information presented is accurate and consistent across all the documents. Incomplete or inaccurate information can cause delays in the approval process.
7. Compare Various Lenders
Comparing the terms provided by various lenders can be beneficial for several reasons. Comparing allows you to check the differences in:
- Interest rates.
- Tenure options.
- Processing charges.
- Customer support.
Using an instant personal loan app can allow you to compare various offers in one place, making the research process easier and swift.
8. Verify Prepayment and Foreclosure Rules
In some cases, the borrowers may want to pay off the loan early. This is called foreclosure of a loan. Some lenders may charge a foreclosure penalty. Knowing about the exact fee amount beforehand will allow you to financially plan your foreclosure.
9. Avoid Multiple Loan Applications Simultaneously
Applying with several lenders simultaneously may affect your credit score. This is because every lender performs a thorough inquiry to evaluate your credit history. Too many inquiries within a short time may lower your credit score. Apply to a few carefully chosen lenders after thorough research.
10. Read Terms and Conditions Thoroughly
Every loan has conditions and terms that outline your role as a borrower. Ensure you read and understand them. Pay attention to repayment terms, default terms, and late payment fees. Clarify everything that seems confusing before you sign.
Conclusion
Nowadays, applying for a personal loan is simple and swift due to the digitalisation of the lending process. However, individuals must borrow only what they can repay. Additionally, take into account your monthly budget while planning repayment. You can use a personal loan EMI calculator to estimate EMIs. A personal loan can finance your needs. However, it also imposes various fees. Research to understand the process and compare lenders to get favourable loan terms. Always read the terms and conditions carefully and select an amount that aligns with your financial strength.
