If you are in need of immediate funds to finance a personal expense but do not have any significant asset or security to put up as collateral, then a personal loan is the best bet to bank on. In this instance, the borrower has the liberty to use the money for any purpose that does not go against the terms and conditions of the agreement signed between the lender and the borrower.
Taking out a personal loan for the first time is a fairly straightforward process. Having said that, first time personal loan borrowers must be mindful of these key factors before closing in on the loan.
Most public, private banks and non-banking financial companies offer personal loans at competitive interest rates and attractive terms. This is the stage where you will be bombarded with phone calls, text messages sharing information on personal loan products from various lenders.
Hence, it is essential to put in some quality research and compare personal loan products before zeroing in on a specific lender. Online is the best way you can start with your research. There are several third party aggregator sites that can help you to compare the products too. This will help you arrive at an informed decision. To avoid scams, it is advised to choose a well known lender which is registered with the RBI, rather than opt for some seemingly wonderful offer by an unverified person or app.
As soon as you are through with your research and comparison phase, you will want to proceed ahead with the actual personal loan application process. While you may approach your chosen lender physically and put in your application offline, the most convenient method would be to apply for a personal loan online.
As soon as you upload your personal and financial information, you will be requested to share documentation to prove your identity, age, and address. If you are salaried, then you will be required to share your Form 16 or pay slips of the past 3 months. Bank statements of the past 6 months will also be required. For self-employed individuals, IT Returns along with Profit & Loss Statements may be required.
As a first time personal loan applicant you must compute the rate of interest applicable on your personal loan to determine that you are, in fact, getting the best deal. Lenders offering a fixed rate of interest take into account possible market fluctuations over the loan tenure and then offer a rate (which also depends on the borrower’s eligibility and requirement).
A floating rate of interest, on the other hand, depends on market rate fluctuations, and may increase your EMI over time. Thus, for better financial planning, it is advisable to opt for a fixed rate since your EMI will remain constant throughout the tenure of the loan, and you will be able to plan your expenses better.
Other than personal loan interest rates, a loan is also accompanied by a host of fees and charges, for example, processing fee, foreclosure charges and more. Ensure that you are fully aware of all such fees and charges and understand them fully before you sign the loan agreement.
Your credit score plays a crucial part in determining whether you are a creditworthy borrower to be approved for a personal loan at all. This is the first eligibility roadblock that you must overcome other than specific requirements that may vary from lender to lender.
You can easily check your credit report prior to making your loan application. With a credit score of 750 and above, you may be eligible for pre-approved offers on Personal Loans, and more from Fullerton India.
First time personal loan borrowers must take into account their prevailing financial liabilities before formally applying for a personal loan. This includes any existing credit card debts, other loans like home loan, car loan, etc. Assess your debt to income ratio which will help you make an informed decision and help you understand you have the financial bandwidth to be eligible for / repay the personal loan that you wish to avail. Simply put, your debt to income ratio can be calculated by taking the sum of your monthly EMIs (including credit card debts) and dividing it with your monthly income. For instance, if you are earning INR 50,000 per month and have monthly obligations of more than INR 20,000 per month, your debt-to-income ratio is 40%.
You may proceed with your personal application if your debt to income ratio is less than 30%. Consider other means of finance, if the percentage is higher.
In order to ensure that you are able to repay your personal loan fully with interest, you must ascertain the maximum amount of your monthly instalment that you are able to bear. Most banks give their customers access to an automated determination of the EMI amount.
Must Read: 8 Smart Right Ways to Use a Personal Loan
You may check out our personal loan EMI calculator where you simply need to enter the personal loan amount that you wish to borrow along with the tenure of repayment and the rate of interest. The tool will generate the monthly EMI that you may need to pay for the selected terms.
Most loans come with the option to foreclose before the expiry of its full repayment tenure. Make sure that you are aware of the foreclosure charges applicable on your personal loan should you wish to take that route in the future. Understand what the minimum lock-in period is and what is the percentage fee associated with prepaying to close the loan before completion of its full repayment term.
By making a note of these 8 essential factors, you can ensure that the process of applying for a personal loan online or offline is a smooth and hassle-free experience.