Personal loans can be used for almost any purpose, from unforeseen medical expenses to home improvement needs, they are a source of extra cash when needed. Unlike a home loan or car loan, personal loans in India are often unsecured in nature meaning that they are not secured by any particular asset that you own. When attempting to obtain a personal loan from a bank or non-bank financial corporation (NBFC), borrowers are not required to submit collateral such as gold or real estate.
For those who are looking to qualify for a personal loan for the first time, it is important to understand the nature of these loans and what are the few things that you should keep in mind when applying online.
Here are six essential tips to consider before applying for an immediate personal loan online. This will help you avoid costly mistakes like choosing the wrong lender, choosing an unsuitable grade, or borrowing more than you need.
1. Maintain a good credit rating
A credit score is an essential measurement that lenders use to determine the ability of any borrower to repay a loan. Simple things like paying your credit card bills on time will help you build a good credit score. One tip for maintaining a positive credit history is not to exceed your credit limit by more than 30%. A good credit score will make it easier for you to qualify for a personal loan.
2. Carefully calculate the monthly payments (EMI)
EMI payments shouldn’t drain your savings and become a burden on your finances. In order to ensure that this does not happen, it is imperative to calculate the EMI amount and ensure the ability of the capital to pay it for the stipulated time. Usually the math is that IMEs should be less than 10% of your monthly income. In case the IMEs are higher, you risk draining your savings and it will have a negative impact on your daily spending.
3. Choose a loan with the lowest interest rate
Personal loans generally have higher interest rates which can range from 11% to 20%. Therefore, even the smallest drop in interest rates can make a big difference in the overall cost of your loan. Keep in mind that if you opt for a low monthly payment over a long repayment term for convenience or other reasons, it will often come with the highest interest rates.
This is an important point because small monthly payments can seem very viable, but it ultimately causes you to pay more for the loan over its lifetime. Therefore, as a general rule, borrowers should aim to spend no more than 35% to 43% on debt, including mortgages, car loans, and personal loan repayments.
4. Assess the need for a loan
While it is not a bad thing to get a loan, it is a financial responsibility that can stretch over a period of time. Hence, it is important to assess the motivations behind the loan and to make sure that it is much needed. If the purpose of the loan is a personal whimsical desire to purchase a luxury item, it may not be the wisest decision.
Also, it is a high risk decision if the idea behind a loan is to invest in other financial products / programs in the hope of making a profit. Such borrowing and reinvestment programs are also subject to market risk and there is never a guarantee of lucrative returns. Hence, you should be wary of taking out loans for high risk businesses because in the end no matter how much profit or loss you are supposed to pay the IMEs for your loan.
A bad investment will lead to massive financial liability, so before applying for a loan, seek advice from the right people on whether the reasons for taking out a loan are financially viable.
5. Always take a loan from a credible financial institution
Besides traditional banks, you can also evaluate options of digital lending companies approved by the market regulator Reserve Bank of India.
Digital lenders are comparatively faster in verifying and processing loan applications, often faster. An example is the payout in fine feature which allows users to choose the repayment schedule based on their working capital cycle, as opposed to the fixed schedule payment.
Other features introduced by digital lending companies include the ability to avail of a shorter term loan and the deferred repayment option allowing customers to request an extension of the repayment date from 30 to 90 days, without having to pay late penalty.
Having multiple options to choose from is beneficial as it further allows a borrower to assess and compare interest rates, processing time, and other important parameters before deciding on their loan.
6. Consider insuring your loan
If there’s one thing we have learned from this pandemic, it’s that life is unpredictable. Therefore, in order to ensure that your loved ones do not end up with loan debt in the event of death, it is important to insure your loan. Loan insurance payments work like any other insurance premium payment; they can be paid on a monthly basis or as a lump sum.
Loan insurance also helps maintain an optimal credit rating because in the event of the unexpected, you will not miss your loan repayment.
Personal loans can be beneficial if used for the right reasons. It’s important to make sure your lender is a real player and that your repayments are prompt and consistent. And most importantly, don’t forget to use the loan for the intended purpose. When used wisely, a personal loan can help you fill a gap in your finances without having to risk your personal wealth.