Tuesday, 23 January 2018

7 Important Things You Should Know Before Applying Personal Loan

Posted by RaviKumar Nama
(Posted on 23-Jan-2018)

A personal loan is a powerful financial tool that you can use when you do not have sufficient funds to make a big purchase. If you have a stable income then a loan helps you manage large expenses by breaking them into smaller payments over a period of time. Personal loans usually have a lower rate of interest than your credit card debts. So if you are strapped for cash, whether it is to cover educational expenses, wedding expenses or home renovation, you can depend on these loans. You can even use these loans to start a business or consolidate your debts. Personal loans usually have a fixed repayment period of 1 – 5 years and a fixed interest rate. You receive a lumpsum amount upfront that you need to pay back by way of EMIs. But before you apply for them there are certain things that you should familiarize yourself with.

7 Important Things You Should Know Before Applying Personal Loan

The following are the important things you should know before applying the Personal loan from any Bank or NBFCs.

1. Unsecured Nature Makes it Risky for the Lenders

Since personal loans are not backed by any collateral, lenders cannot seize any of your property to recover the amount in case you fail to pay back the debt. Though they can hire a collections agency or file a lawsuit against you, still these loans are considered riskier by the lenders. Hence these loans usually carry a higher interest rate than secured loans.

2. CIBIL Score Affects the Approval Process

With no collateral to bank on, lenders want to make sure that they give loans only to people who have a past history of handling credit responsibly. For this, they check the CIBIL score of the borrowers. This score gives them a clear picture of how well you have managed your previous debts. A person with a high CIBIL score will have a good credit history and hence he can easily get approved for loans.

3. Interest Rate

Lenders usually use a risk based pricing for these loans. This implies a higher interest rate for high risk individuals. Banks check the CIBIL score to determine the level of risk associated with the borrower. A low CIBIL score will attract a high rate of interest so as to cover for the additional risk of lending to a not-so-worthy borrower. But these rates may differ from lender to lender, so one needs to do some shopping around so as to get the best rates.

4. Other Charges

When you shop around for personal loans compare the total cost of the loan and not just the interest rates. Find out the processing fee or documentation charges that you need to pay when you file a loan application. Some lenders try to sell an insurance policy along with the loan, which isn’t quite necessary for you to take. Many lenders charge the prepayment penalty if you pay the loan ahead of the schedule. Some lenders use a pre compute method of calculating interest rate, which means that your interest cost will not come down even if you have surplus funds to repay the loan. Watch out for these clauses before signing on the dotted line.

5. Purpose

One good thing about the personal loan is that you need not specify the reason for which you need money. Though you can fund any expenses that you want, you should exercise caution before taking this loan. Do not depend on them to go on a vacation or splurge on luxuries. If you have a low credit score, then these loans might prove to be quite expensive. Personal loans are ideal when one needs funds quickly like in case of a medical emergency. Quick processing time and minimal documentation make these loans easy to obtain. ICICI Personal loans get disbursed within 3 days of document submission. They have a fixed interest rate throughout the loan tenure. The borrower can choose a tenure from 12 months to 60 months.

6. Plan to Pay it off

Though a personal loan is unsecured, do not think that you can get away if you do not repay the debt in a timely fashion. Like all other loans, the lenders report the activities of the borrower to the credit bureau. Making timely payments will help in building a positive credit history. Failure in servicing the EMIs will not only attract the penalty but also gives you low cibil score. This may affect your future ability to get approved for loans. So make a thorough assessment of your repayment capacity and borrow only if you think you can honour this obligation.

7. Prepare Before You File an Application

The key to getting the best possible terms and interest rates on personal loans are to have an impeccable credit profile. Check your CIBIL report and score prior to filing an application to make sure that there are no errors. Practice good credit habits so that you have a sound credit profile.

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