What’s a personal loan, and how is it different from other loans?
A personal loan is given by various lenders and comes in a variety of forms rolled out for purposes suiting to different occasions. It’s an easy fix when you find yourself in a strained financial position and needs just a bit to push along. The personal loan are quite popular for being highly flexible, are distributed faster, and the procedural requirements are considerably low than other types of loans.
Personal loans are a pricey matter since, unlike other loans, they are unsecured. You don’t give any security for a traditional personal loan, and the bank charges a high rate of interest in consideration to bear the risk of default.
When you apply for a personal loan to a bank or financial institution, your application is screened, and based on various factors lies the fate of the success of grant of such loan.
Banks normally consider the applicant’s age, income, credit history and score, relationship with the bank, if any.
Before you apply for the loan, get familiarized with the terms.:
Principal
It’s basically an amount you borrow from the bank. For eg., if you’re to take a loan of Rs. 10 lacs, interest will be calculated on this principal amount which gets reduced over time as you repay.
Interest
There are different types of interests, and their calculation varies. Some banks charge fixed while some charge a floating rate of interest on the loan. Take help, if required, and consider the interest calculations before finalizing the process.
Tenure/Term
Tenure is the period for which the loan is in substance, and you’ll have to repay the principal and interest during such tenure of the loan.
Equated Monthly installments
They are calculated on the outstanding principal amount and imposed interest on it and are what you pay the bank monthly. Beware of the 0% EMI schemes. They are sometimes merely a ploy to lure and take unfair advantage of innocent customers.
Know This Before You Apply For A Personal Loan:
- Effect of inquiry on your credit score.
Know that your credit report is hit with an inquiry when you apply for a personal loan as they assess your repayment abilities. When the bank makes a hard inquiry on your report, your credit score is impacted negatively. Check if the pre-approval facility is available, as it counts as a soft inquiry and doesn’t affect your credit report.
- Look at what other lenders have to offer.
Don’t fall for the first offer that comes your way. Although, it’s recommended to take a loan from a bank in which you’re an existing customer, research about different banks and their lending policies, interest rates, and terms of repayment before settling on one.
- Consider all the charges related to the loan.
Consider all the charges, upfront and slipped in, carefully before you apply. Usually, all banks charge processing fees up to 1-2% of the loan amount. You may also find charges like late payment fees, pre-payment, or foreclosure charges.
- Know that interest rates can be negotiated.
If you have a strong credit score, you’ll find heaps of banks willing to give you a personal loan. You can haggle with the bank for a lower interest rate which will significantly reduce the overall debt burden.
- Banks are sometimes keen on giving unpleasant surprises, so read the documents carefully.
Go through the loan documents with extreme care. Make sure you understand everything beforehand. Don’t be afraid to ask questions.
- Take what you need and not what’s being offered.
Know how much you really need. Personal loans are not suitable for financing fancy cravings, and they are to finance your requirements. Use the option of loan wisely.
Keeping these simple things in mind will elevate the process smoothly and save you from future inconveniences.
