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Several banks and lending institutions provide personal loans for borrowers. Personal loans are a very flexible financial tool that can be used to finance a plethora of things, including but not limited to paying for vacations, weddings, medical expenses, interest payments amongst several others. Personal loans are some of the most popular loans being availed by people. They are unsecured in nature that is they are not secured against any collateral or asset. Key criteria that affect your ability to get a personal loan include income, credit score, age, employment history, repayment capacity amongst others. Additionally, lenders usually do not restrict the use of funds availed by a personal loan, except for illegal activities.
Since borrowers do not put up any collateral such as property or gold to avail such loans, if you default on the loan, the lender cannot auction anything you own. It is important to remember that since they have a greater risk attached to them, personal loan attract a higher rate of interest than a home, car or other loans. As personal loans continue to become more and more popular, there are some important questions you must answer as you decide which personal loan will be best for you.
Before you apply for personal loan, one of the first things you should do is compare the rates of interest. The first step to choosing your personal loan is to do your research and compare different banks and lending services and the interest rates they offer, no matter how attractive one might seem. You can do your own research online, by visiting the websites of banks and lending institutions in your area to see which interest rates seem attractive. Alternatively, you can also visit branches of banks to consult the help of an agent and find out more about the interest rates on offer. Compare and contrast the rates effectively to gain an idea about how much you will be required to pay.
One of the critical mistakes people make while choosing what personal loan to opt for, is they forget to factor in other fees and charges such as processing fees, late payment charges, cheque bounce charges, loan cancellation charges and service tax for each service provided by the bank. These can add up and make your personal loan quite costly. Hence, it is important that you factor these costs into the cost of borrowing.
It is important to note that most personal loans have full or partial pre-payment charges, meaning that if you want to pay off your loan before the tenure is over, you will have to pay a small fee. This could be anywhere between 2-5% of your loan’s balance amount. However, you should remember that you will no longer be required to pay interest on the outstanding value so if foreclosure fees are less than interest rates, you should go for it.
The main monthly cost of your personal loan will be the EMI payments. You should ensure that you can afford the EMI payment, given your income and other mandatory expenses without any default or penalties. You can use online personal EMI calculators, to estimate how much EMI you will have to pay for the personal loan amount you wish to take out.
While personal loans are extremely flexible and most salaried or self-employed individuals are likely to have the eligibility for personal loans, they are not always the only option available. If you just need a small sum of money, consider asking friends or family, or perhaps spending on your credit card.
Whatever personal loan you decide to opt for, ensure that you have the capability to pay it back in a timely manner. Always ensure you do not borrow more than you can pay back. Taking out a personal loan, no matter how small an amount means increasing your monthly fixed expenses, hence, the decision should be taken carefully.