How to take a loan, a Step-by-Step guide
There are many loan providers for your different needs. The decision of choosing a particular loan depends on your particular requirements and conditions. You can make a better decision if you are well informed. This article provides you with details of what you need to keep in mind before applying, during loan processing and after taking the loan.
Get an estimate of how much money you can borrow.
To start with, it’s important to get a good estimate of how much money you can borrow. Within the above ceiling, the loan amount in the range of 2-3 times the annual household income of the borrower can be sanctioned. Knowing your borrowing power saves you time.
Asses your repayment capacity.
The loan amount granted to you also depends upon your repayment capacity. The loan is repayable in the form of Equated Monthly Installments (EMI). The EMI would not exceed 50 per cent of your monthly household income. You can also opt for clubbing your spouse’s income along with your income if you want to enhance the loan amount that is sanctioned to you.
Check out the interest rates being offered by different institutions.
The interest rates vary, depending on the tenure of the loan and the amount of the loan. The interest rates offered by one institution can be more than that of other institutions for a particular tenure, and can be less for a different tenure.
A loan should fit your pocket and the term you wish to take it for. You will need to get quotes of all the finance companies and map them according to your requirements.
Check out the administrative and processing charges.
Companies charge certain processing fees for moving the case. Besides the processing fees, some companies also charge administrative fees for getting the legal appraisal and address verification done. These charges are one-time charges collected by the institution.
Be cognizant of the other charges like prepayment charges, etc.
Other charges are loaded which increase the effective cost, like prepayment charges and commitment fees. The prepayment charges are levied if you are prepaying the loan amount before the schedule, decided at the time of sanctioning the loan. It is levied because it disturbs the financial planning of the company. So you can appreciate the fact that the interest costs are not the only costs which the borrower has to bear. These charges go on to increase the real cost to the borrower and takes it above the stated rate of interest.
Compare loan schemes of different finance companies
Compare loan schemes of different finance companies on parameters such as interest rates, pre-payment clause, upfront margin to be paid, Maximum loan amount, eligibility, etc. You should check the following :
- What the monthly loan payment is and what interest rate that translates into
- The duration of the loan
- Does the scheme fit with your requirements
Zero in on the company you want to take the funding from.
After weighing the pros and cons of all these factors, you can zero in on the company from which you want the funding. You will be asked to furnish personal documents. Personal documents include age proof, employment details, salary slip, copy of income tax returns, etc.
Read to Documents and ask questions.
Try to get a copy of the agreement or contract before you get into one. Understanding the important clauses within the agreement can help you avoid a lot of trouble in future. You can get all ambiguities resolved by speaking to the staff of the bank or finance company, in whose favour you shall be drawing the post-dated cheques towards repayment of your personal loan Contract. In case you are uncomfortable with the terms, simply don’t take the loan from that lender.
Always read the loan application and offer documents and look for the hooks. Here are some typical pointers:
- Check if there is a pre-payment penalty – if there is one, find out which has the lowest rate
- Look for the longest grace periods – look for cards that give you the maximum number of days to pay back the due amount without an interest charge
- Find out whether the interest remains constant through the contract period
- Read the fine print carefully. Remember, if there is a problem later, what is written is what counts
- What the marketing person tells you verbally, carries no weight. You sign an agreement/contract that has been filled up by the financier. Signing blank agreements definitely do not work favorably for you.
Read between the lines.
The company will also ask you to sign some documents. You should try to read between the lines and only after carefully understanding the legal implications involved in all the agreements, you should put your signature. Always ask questions in case you need any clarification, especially in matters regarding the legal recourse the company has against you, in case you default on the repayment of even a single installment or in case the cheque issued by you bounces.
Get your documentation in order.
No matter who lends you the money, you need to have some basic documents ready:
- Proof of Income
- Proof of Residence
- Banking History
- Proof of Identity
- Signature verification from the bank.
- Post-Dated-Cheques or Employers’ Authority for salary check-off facility.
Fulfill all the formalities.
After you have fulfilled all the formalities to the satisfaction of the company, the company will send the documents along with post-dated cheques to their processing centre.
Pay the installments on time.
Once the loan has been sanctioned to you, make sure you pay the installments on time. This will help you to maintain a good credit relationship with the lender. It will not increase your overall loan cost, rather you will be benefited by a lower cost loan in future. Ask for the interest computation sheet or the loan statement at the end of the year. Verify the interest rate charged.
There is no law or regulation that requires lenders to use a standard format to disclose all their interest charges and fees. That gives lenders the opportunity to play around with the way they sell you the loan. The loan could turn out to be very expensive if you added up the processing charges and the dates on which you have to pay back your installments.
Get the lender to give you all the charges, obvious and hidden, in writing, with a statement that there are no other charges. Most lenders will not give you anything in writing because they thrive on making money through the back door. Talk to a few friends and relatives who may have taken a similar loan from the same lender and see what their experience has been.