A personal loan is probably one of the quickest ways to get cash when you are in urgent need. These loans are usually unsecured loans processed quickly with minimal documentation, and the loan amount is directly credited to your bank account in no time. But applying for a personal loan is a lot more than filling up an application and hoping for it to get approved. As a discerning borrower, before you apply for a personal loan, you need to have a clear understanding of what you are getting into.
Here’s a 9-point checklist you should follow for choosing the right personal loan:
1. Evaluate Your Needs
A personal loan is a financial commitment and therefore shouldn’t be taken lightly. You need to first evaluate how much loan you need and for what purpose. Assess your financial capability. Can you afford to repay this amount over time?
Also, don’t be tempted to borrow more than you need, even if you are eligible for a larger amount. The lesser the amount you borrow, the easier it is to repay it.
2. Know the Eligibility Norms
Personal loan lenders consider your present income, current employer, repayment capacity, credit score and monthly payment obligations before they decide to approve the loan. Your credit score is crucial in loan approvals. The higher the credit score, the better are your chances of loan approval with better loan terms. Make sure your credit score is good enough to fetch you a low-interest personal loan at better loan terms.
3. Shop Around
Don’t take the first personal loan offer that comes your way. Shop around to understand the offers in the market to ensure you get the best deal. Compare the interest rates and other loan terms offered by different banks and NBFCs to find the one that’s best for you.
4. Compare Interest Rates
The interest rate directly impacts the EMI amount and your repayment capability. If the EMI amount is high, it is harder to repay. There are plenty of banks and NBFCs that offer a wide range of interest rates. Do your research to find the best interest rate for your credit profile.
5. Assess the Credibility of Lender
There was a time when banks were the only ones from whom you could borrow without any worry. But today, there are plenty of lenders in the personal loan space offering loans at attractive interest rates. Before you apply for a personal loan, ensure that you check the lender’s credibility by reading online reviews and testimonials.
6. Decide on the Repayment Period
Personal loans are offered at loan tenures ranging from one to five years. If you choose a shorter tenure, the interest you’ll pay on your loan will be comparatively lower, but your EMI will be relatively higher. Decide the repayment tenure depending on your convenience and repayment capacity.
7. Know Your EMI
EMI is Equated Monthly Instalment, and it is a crucial factor to consider before applying for a personal loan. It refers to the amount you pay back to the lender every month; The EMI contains a portion of the principal amount plus interest amount. Missing even a single EMI can significantly harm your credit score. Therefore, it is wise to use an EMI calculator to get an idea of your EMI amount before applying for a personal loan.
8. Determine Total Cost of the Loan
Once you have figured out your loan amount, determine the total cost of your loan, which also include the interest rate and other charges. Make sure there are no hidden charges included in the total cost, such as subscription fees, creation fees, management fees, processing fees, credit report fees, and any other fees, in return for a low-interest rate.
9. Ease of Application
Most banks ask for an exhaustive list of documents as a part of their loan application process, making it inconvenient, time-consuming and lengthy. However, quite a few technology-driven lenders process a loan faster and with minimal documentation. If your need for money is urgent, decide on a lender with a fast and convenient application process.
Now that you know what factors to consider before applying for a personal loan, these pointers can guide you to choose the best loan offer. It’s always a good idea to borrow what you need and choose a personal loan offer that works for you and your financial situation.