Personal Loans are a great way to get yourself some quick cash. You can take a Personal Loan for Medical Emergency, to fund your family vacation or to sponsor your child’s wedding. The reasons are almost endless. Personal Loans can truly be very useful in times of need. However, it is important to learn what you should or shouldn’t do when applying for such a loan.
Here is a detailed look at the top 5 dos and top 5 don’ts when applying for a Personal Loan:
1) Check your Credit Score
The first step you should take before applying for a loan is to find out your credit rating. If you have a low score, then there is a big possibility that you will only be offered high interest rates by the lending institutions. Therefore, it is best to find out your credit score before you start applying. This gives you the opportunity to work on improving your score. If you have any outstanding bills or unpaid loans, start repaying those immediately. This will help you improve your credit rating, thereby making it possible for you to get a better interest rate on your new Personal Loan.
2) Shop Around to Compare
Taking a Personal Loan, it is a good idea to spend some time to shop around between different banks. Most people think that taking a loan from their current bank is the cheapest option because the bank advertises that it offers preferential rates to its existing customers. However, even though this rate may be less than what new customers get, it may not be the lowest rate in the market.
3) Ask for a Full Disclosure of Fees
The interest rate may seem low at a specific bank, but you may end up having to pay multiple extra fees and penalties. For example, some lenders ask for an origination fee, which is basically a charge to process your loan. Many banks also levy a prepayment penalty, if you return your loan before the end of the tenure. This is their way of making up for the interest they would have otherwise earned if you had completed your tenure. You should ask for the total amount repayable (TAR), which is the total cost of the Personal Loan from the first to the last payment.
4) Check the Eligibility Criteria
Before applying for a Loan, take a careful look at the eligibility criteria for personal loan. Apply only if you meet the necessary criteria. Some factors that the bank may be particular about are age, income, and location. There is no point in applying for something, only to get rejected. It will not only waste your time but may leave a negative mark on your credit history.
5) Find out about Payment Protection Insurance
PPI (payment protection insurance) is an insurance that has been designed to cover your monthly repayments if in case you are unable to meet them because you are ill, have been in an accident, or are suddenly unemployed. This ensures that you do not default on the loan. Most banks offer this insurance when giving you the loan. However, always read the fine print before signing, as insurance policies come with a long and complicated list of exclusions. Of course, you have the freedom to take a loan without taking a PPI.
1) Don’t Borrow More than Needed
Before applying for the loan, take a look at your current finances to calculate how much you can comfortably take on. Banks often try to give you a loan amount that is higher than what you need. This may seem tempting to you as the the interest rate is inversely proportional to the loan amount. However, you should be careful not to fall into this debt trap. A higher capital means that you will have to pay larger monthly repayments. This loan may actually end up putting more financial pressure on you, rather than easing it. Simply hold your ground and don’t bite off more than you can chew.
2) Don’t Borrow for Longer than Needed
The cost of your monthly repayments of your Personal Loan also depends on the duration of the tenure. A longer term will ensure that your monthly repayments will reduce. However, you will have to pay a higher interest rate. So calculate the maximum that you can comfortably pay every month, and that should help you figure out the tenure.
3) Don’t Apply for Too Many Loans
Many people think that applying for a Personal Loan from multiple places increases their chances of getting it. However, it is best to not to take this path. This is because every time you apply for a loan, it leaves a ding on your credit report. So basically you end up with a multiple number of negative footprints, which brings down your credit score. This, in turn, makes you look desperate in front of your potential lenders, and they will only offer you expensive deals or simply reject your application.
4) Don’t Allow automatic Withdrawals
Many lending institutions ask you for access to your bank account, so that they can automatically withdraw the repayment amount every month. Though this sounds like a hassle free system, it comes with one little problem. Say you suddenly need some extra capital money in a particular month, you might find yourself without the required funds because your account has already been debited by the lender. Unless you are a 100% sure of your finances, it is best to retain full control over your own money.
5) Don’t Fall for Scams
Most people shop online for Personal Loans these days. It saves you money, time and effort, and these online banks usually offer better rates than brick-and-mortar institutions. However, beware of online lenders that actively scam people. They guarantee loan approval and offer extremely low interest rates. This prompts borrowers to pay the advance fees. The scammers then disappear with the money. So be careful! Do your research and only apply for Personal Loans from established and reputed banking institutions.
Now that you know the top 5 dos and don’ts, you should easily be able to find a bank that offers terms and conditions that best suit your needs.