Personal loans are the most popular option for raising funds in times of need, especially short-term requirements. This is because:
Precautions when applying for a personal loan
Outflow vs. Inflow: Being unsecured advances, lenders take on higher risks when compared to secured loans like home or auto loans. To compensate for the lack of security, lenders usually charge high interest rates on personal loans making them expensive sources of funds. This is compounded by the fact that these are usually short-term advances. Short tenures translate to higher EMIs.
Hidden costs: Processing fees and other charges are also levied in addition to the interest charges, adding to the cost of the loan. They are usually charged as a percentage of the total approved loan amount. Ranging between 1% - 2%, this can be a substantial amount, usually required to paid at the onset of the loan period.
Popularity vs. Prudence: Most often, people borrow from lenders who are well-known in the market through their aggressive marketing strategies. These lenders are not always the best choice.
Secure Vs. Unsecured Loans: While unsecured loans are convenient, it also means higher costs to compensate for the risk of default.
Credit Scores: Lenders depend on borrowers’ credit scores to judge credit worthiness and repayment abilities. Usually, a CIBIL score of 750 - 900 points is considered good. Most customers are unaware of their credit rating when applying for a personal loan and are either rejected or approved for lower amounts than expected.
Terms and Conditions: Most borrowers look at the interest rates offered on a loan because this makes up the chunk of the loan costs. However, there may be conditions that have not been explicitly mentioned when applying for the loan. For e.g. penalties for late payments or early closure of the loan (prepayment), repayment modes etc.
Calculation of EMIs: Loans are repaid over the loan period in the form of monthly installments called EMIs. The basis of calculating EMIs can be confusing. It may also vary between lenders. EMIs can be calculated on a fixed yearly, monthly or daily reducing basis.
There are a number of advantages and disadvantages to be considered when applying for a personal loan. All of them must be studied carefully before finalising on a particular scheme so to get the best deal and avoid unnecessary fallouts.
- They are unsecured loans so there’s no time or effort lost in arranging collateral. It also means less paperwork, which means shorter processing times, leading to quick approvals and disbursals.
- The purpose it is availed for is not restricted. It can be used to fund anything from a holiday to home repairs to a wedding.
- A substantial amount of funds can be obtained through this type of advance. Depending on the borrower’s repayment capacity, amounts disbursed can be as much as Rs.30 lakhs.
Precautions when applying for a personal loan
Outflow vs. Inflow: Being unsecured advances, lenders take on higher risks when compared to secured loans like home or auto loans. To compensate for the lack of security, lenders usually charge high interest rates on personal loans making them expensive sources of funds. This is compounded by the fact that these are usually short-term advances. Short tenures translate to higher EMIs.
- Interest rates should be considered in line with monthly disposable income so as not to strain personal finances. Always account for emergencies and other financial requirements before deciding whether a loan is affordable.
Hidden costs: Processing fees and other charges are also levied in addition to the interest charges, adding to the cost of the loan. They are usually charged as a percentage of the total approved loan amount. Ranging between 1% - 2%, this can be a substantial amount, usually required to paid at the onset of the loan period.
- Factor in all costs before ascertaining the viability of a personal loan. Bargain with lenders to get a better deal either through lower interest rates or by getting waivers on processing and other fees.
Popularity vs. Prudence: Most often, people borrow from lenders who are well-known in the market through their aggressive marketing strategies. These lenders are not always the best choice.
- Always research and compare the different loan schemes available in the market. Lenders competing to enhance their customer-base are more willing to offer better deals than established, market leaders. Also, study lenders’ service standards with regards to approval processes, loan disbursals and grace periods for late payments; these matter as much as costs in obtaining adequate and timely finance.
Secure Vs. Unsecured Loans: While unsecured loans are convenient, it also means higher costs to compensate for the risk of default.
- Explore the option of securing personal loans so as to bring down interest charges. Securing the loan also enhances eligibility by improving the borrower’s creditworthiness. Besides real estate property, loans can also be secured against amounts held as fixed deposits and insurance policies or shares.
Credit Scores: Lenders depend on borrowers’ credit scores to judge credit worthiness and repayment abilities. Usually, a CIBIL score of 750 - 900 points is considered good. Most customers are unaware of their credit rating when applying for a personal loan and are either rejected or approved for lower amounts than expected.
- CIBIL scores can be easily obtained online. A high score reflects high credit worthiness and acts as a good bargaining point. It can be used to avail lower costs or higher loan amounts. A low score can help borrowers prepare for the eventuality of being approved for a lower loan amount than they applied for. This helps in reassessing credit requirements and arranging additional sources of funds.
Terms and Conditions: Most borrowers look at the interest rates offered on a loan because this makes up the chunk of the loan costs. However, there may be conditions that have not been explicitly mentioned when applying for the loan. For e.g. penalties for late payments or early closure of the loan (prepayment), repayment modes etc.
- Always check the loan agreement thoroughly so as not to be caught unawares and unprepared to meet additional costs.
Calculation of EMIs: Loans are repaid over the loan period in the form of monthly installments called EMIs. The basis of calculating EMIs can be confusing. It may also vary between lenders. EMIs can be calculated on a fixed yearly, monthly or daily reducing basis.
- A daily reducing basis is cheaper than than a fixed yearly basis. The basis of calculation greatly affects repayments and should be clearly determined before signing the loan agreement. There are a number of online calculators that make EMI calculations easy and transparent.
There are a number of advantages and disadvantages to be considered when applying for a personal loan. All of them must be studied carefully before finalising on a particular scheme so to get the best deal and avoid unnecessary fallouts.