A personal loan is an unsecured loan that is granted on the basis of the applicant’s credit score and monthly income. Since the loan is unsecured, it attracts a slightly higher interest charge than a secured loan. Most people take a personal loan to deal with a financial emergency, home improvement, medical emergency, vacation, vehicle purchase, a wedding expense, or higher education expense. A personal loan is not a bad option to help you deal with certain types of financial requirements, but you have to make sure that you take into account certain factors before you apply for the loan.
How Much Do You Really Need?
Whether you need a personal loan to pay a medical bill or to go on a vacation, you need to first ascertain how much you really need. Try to be conservative in your estimate, because you should borrow only what you really need. Remember the saying- never bite more than you can chew. If you borrow more than you need, you will just end up paying interest on money that you did not need. This is not a sound financial habit. You need to first sit down and come up with the exact amount that you need before you apply for a personal loan.
Find Out Your Credit Score
Your credit score is going to be one of the main deciding factors in helping you get the personal loan. You need to first find out your credit score if you do not already know it. Your credit score, also known as the CIBIL score, falls between the range of 300 and 900. If your score is above 750, you will qualify for a loan with a reasonable interest rate. If your credit score is not good, the interest rate on your personal loan will be high. Do you have the finances to pay a personal loan with high-interest rate? Think everything thoroughly before you take such a loan.
Your Current Financial Situation
The bank will look at your current financial situation to see if you qualify for a personal loan. You should have a certain amount of monthly income to qualify for a personal loan. If your current financial situation will not allow you to make the monthly payments on time, it is best to avoid taking a personal loan. You should not just look at your current financial condition, you should also take into consideration your future financial condition before applying for a personal loan. Do you have a marriage or some other financial obligation coming up in the next few months? Will this financial obligation allow you to make the monthly payments on time? If the answer is yes, you can go ahead and apply for a loan.
Interest rates are an integral part of loans. The interest rate that the bank will charge on your loan will depend on your credit score and monthly income. The interest rates charged by banks can start from 11% and go as high as 22%. If your credit score is low, the interest rate on your loan is going to be on the higher side. However, you should not lose heart. Shop around a little bit for the loan and you might be able to find a lender who is willing to offer you a loan at a reasonable interest rate, provided that your monthly income is high. If your credit score is not allowing you to get a loan at a reasonable interest rate, it is best to delay that loan application. Improve your credit score and then go for a loan.
Are you aware that besides the interest rate, the bank might also charge you a processing fee and credit report fee, which is levied for checking your credit score? The processing fee can fall within the range of 0.20% and 3.03% of the total amount loaned. Besides these fees, the banks can add some hidden charges, like insurance charge, servicing fee, and withdrawal fee, to the monthly payment. So make sure that you enquire about all the charges and read the fine prints, before signing on the loan form. These hidden fees can make your monthly payments quite high.
The term of a personal loan can range from 12 months to 84 months. When you take a personal loan, you have to consider how soon you can repay the loan. Keep in mind that the longer the term of your loan, the higher the amount that you will end up paying in total. If you keep the loan term too short, the bank would probably charge you higher interest rate. Whatever your decision is on the term of your loan, it should be based on how much you can afford to pay every month towards the loan payment.
This refers to the fee that the bank will charge if you repay the loan before the end of its term. Before you agree to the loan, make sure you know how much pre-payment fee the bank will charge you. Some banks do have a high pre-payment fee, but if you shop around you can find a lender that has a reasonable pre-payment fee. In fact, some banks today have done away with pre-payment fee to attract more customers. All you have to do is look around.
The late charge varies from bank to bank. It is also based on the loan amount. Make sure that you are aware of it beforehand and try to avoid it as much as possible. Remember that if you are late with your payments, these late charges can really add up in no time.
There are certain document requirements that every bank has for a personal loan. The bank would require an identity proof. The bank needs to verify your residential address, age, employment status, and monthly income and you need to furnish documents supporting them.
Monthly Budget Plan
Have a monthly plan ready before you apply for the loan. You have to set aside a certain amount every month for the loan. You might have to cut down on certain expenditures to make the monthly payments towards your loan. Once you have the budget ready, make sure that you stick to it.
Careful consideration of all the above-mentioned factors will help you reach an informed decision on your personal loan.