Personal loans need no introduction. They come in handy to bridge financial gaps, be it emergency expenses or just about any spend of your fancy. The catch however is that they can get costly. With so many reputed banks and financial institutions to the rescue, those looking for personal loans are spoilt for choice. Easy availability does not mean that these loans are cheap as they have conditions attached!
So what exactly should you know before signing up for a personal loan? Let’s spruce up some basics.
- Personal loans are unsecured. They are issued without any collateral and the use of funds is not tracked.
- Pre-approved personal loans are available today to literally anyone who has a stable income and can furnish the necessary proof of income, job continuity, and repayment capacity. A minimum income condition too may be applicable for availing personal loans from select lenders.
- Furnishing the necessary proof could get cumbersome at the last minute. Make sure to have copies of bank statements, salary slips or certificates, most recent form 16 and of course address and ID proofs in order to ensure speedy clearance.
- An impeccable credit history however is a must to avail personal loans from reputed lenders. This simply means applicants should have a clean repayment track record for credit card dues and loans availed earlier. Those with lower credit scores resulting from delayed / pending payments and penalties are likely to be charged a higher interest on personal loans.
- That said, personal loans are costly because they are not backed by collateral. They really make sense only when the expense is huge and cannot be met by other means. You’ll have to be prepared to shell out high EMIs based on the interest rate (11%-25% per year) and loan term (1-5 years). You also need to note that the amount you pay up will probably be 1.5 times your loan amount. Do the math and compare loan offers carefully.
- Apart from the interest rates and EMI, a few other numbers also add to the cost of the loan. These also need to be noted as they too can make a significant difference. Banks levy a processing fee, which is payable upfront. It can either be a flat fee or a fixed percentage of the loan amount.
- It is but natural for people to settle debts as early as possible, if the necessary funds are available. However, you are bound to be penalized (2-5% of the remaining principal) for prepayment of dues in case of personal loans, as lenders tend to lose out on the additional interest. You also can pay up the outstanding amount only after a specific period of time has elapsed since availing the loan.
- Personal loan repayments also attract a late fee every month, in case you don’t honour EMI payments by the due date. You must arrange for a smooth cash flow to clear monthly EMIs in a timely manner throughout the tenure of the loan to avoid penalty and of course a dip in your credit score.
- Shop only after thorough due diligence. Loans with flexible interest rates are also available. But they can prove a burden as well. Credibility of the lender plus affordability of the loan need careful attention. It is better to settle for a loan with a low EMI
- It is possible to switch lenders if you are paying a higher interest. If your application is cleared, the new lender will pay up old dues and offer a fresh loan. You can pay that back, most likely at a preferential interest rate.
Personal loans unless unavoidable are simply not justified!