5 Personal Loan Tips for Salaried Employees - Personal Loan Blog - Tata Capital

5 Personal Finance Tips for Salaried Employees

Feb 27, 2017

Do you get constant emails from your bank for a pre-approved personal loan? Mitesh Sahai did. He works as an operations manager at an MNC. For the last few months, Mitesh wanted to renovate his apartment. But he kept postponing it due to lack of funds. However, the frequent emails convinced him to take a personal loan and give his home a facelift.

From Mitesh's experience, here are five things a salaried employee must do before taking a personal loan:

Do your homework

When you go loan shopping, check the interest rates various banks are offering. Look for the lowest interest rate to keep your borrowing cost low. Being unsecured loans, personal loans have high interest rates. Check with your bank if it can offer you a better rate since you are a customer. Be sure to check the terms and conditions of each bank so that you can make an informed decision.

Check eligibility

To be eligible for a personal loan, salaried employees must be in a stable job for at least two years. If you are a job-hopper, you may be denied a loan. Or, you may be charged a higher rate of interest. If you are a fresher with less than a year in a job, you may not be eligible for a loan. There is also a criterion with a threshold for salary. You salary should be at least Rs 20,000 per month for you to be able to apply for a personal loan.

Choose EMI wisely

You must realise that EMIs would eat into your monthly salary. So, if you think you may not be able to pay the EMIs, try to reduce the amount. You can do so by extending the tenure or reducing the loan amount. Also, take this as an opportunity to rethink whether you really need the loan. If you need a loan of only Rs 1 lakh, stick to it. Do not succumb to the attractive add-ons and offers. At first sight, they may seem beneficial. But they could end up only adding to your EMI.

Beware of hidden costs

The rate of interest is not the only cost of taking the loan. Other costs are also involved. They could increase your cost of borrowing. Banks generally charge a processing fee as a percentage of the loan amount or as a fixed amount. Perhaps you are taking the loan to manage a cash crunch and intend to repay when the crisis ends. In that case, you would save a lot on the interest. But you would have to cough up a pre-payment penalty. Needless to say, if you fail to pay the EMIs on time, the bank will levy a late payment fee. So, know about these costs to avoid any surprises later.

Check credit score

Before approving any type of loan, the lender will dig into your credit history. If your score is high, the bank may consider reducing the interest rate. Hence, before you apply for the loan, check your credit score. If it is low, you can try to improve it. This would improve your chances of getting loan approval. Avoid applying to too many banks to find out the interest rates on offer. Too many inquiries could affect your credit score.

The bottom line

As an employee, you have a restricted source of income. Before taking a personal loan, make sure your finances are enough for the repayment. Remember that a personal loan is a luxury. Use it only in times of emergency.