9 Things to Consider before Applying for a Personal Loan

Mar 01, 2017

Quite often, you may receive a call from banks stating that you are eligible for a loan. You may also be offered attractive interest rate on the loan. However, it is important to understand that there are many aspects which have to be taken into consideration before opting for a loan. Unnecessary borrowing may lead to debt obligations in the future if you are unable to repay the loan.

Following are nine aspects that have to be kept in mind before applying for a loan.

  1. Find out the total cost of the loan
    Usually, lenders reveal the interest rate applicable on the loan. The other fees and charges are hidden in the fine print. Therefore, it is important to have knowledge about other costs, like processing fee, late payment fee, besides others.
  2. Understand the type of interest
    Interest on the loan is calculated either through flat rate interest or reducing balanced interest. Flat rate is the fixed rate applied to the loan amount. It does not decrease as the loan gets paid off. On the contrary, reducing rate indicates reduced interest with every EMI. Flat rate interest is generally provided at lower interest rate. However, this does not imply that the total cost of the loan will be less. Hence, choose the interest type which is best suited for your needs.
  3. Compare various lenders
    There are numerous lenders in the market, with different interest rates. Select the best option after taking into consideration certain factors like lender reputation, interest rates, choice of repayment schemes, besides others.
  4. Borrow how much you can afford
    Many individuals seek loans of a higher amount with the thought that extra cash will do more good than harm. However, if you borrow a higher amount and are unable to repay, chances are you will default on your payments. This in turn may negatively affect your credit score.
  5. Analyze your credit score
    Most lenders require applicants to have a good credit score. Lenders also offer competitive rates to such individuals, as the risk associated with non-payment is less. Hence, it is advisable to apply for a loan once you have corrected your credit score.
  6. Make sure your documents are in order
    Every applicant has to submit personal loan documents while applying for a loan. Hence make sure your identity proof, address proof as well as income proof documents are in place. Once all the documents are successfully submitted, the approval takes place quickly.
  7. Analyze your add-on requirements
    Quite often, lending institutions sell add-ons, like insurance plans, which increase the total cost of the loan. Opt for an add-on only if it is necessary for you. These costs are usually added in your EMIs, making the loan more expensive.
  8. Seek advice
    Borrowing a loan is a huge financial decision. If you face confusion at any stage, consult your financial advisor. You may even seek advice from your close friends and family who have knowledge about personal loan procedure, eligibility, and other factors.
  9. Know about the privacy policies
    Read the Privacy Policy of the loan agreement in detail. Some lenders may reject your loan application and may then pass on your personal details to other lenders in exchange for a good commission.

Personal loan is a great financial tool during times of emergency. However, borrow only in case of a financial requirement. Also, consider all the aspects of a loan before applying for one such as personal loan process, eligibility, and documentation, besides others. This knowledge will go a long way in obtaining a loan without any hassles.