Need a personal loan? Remember these points
The biggest advantage of a personal loan is that it is an all-purpose loan. So you can take a personal loan to take your family on a trip to Australia, or buy the latest Sony LCD TV, or even to pay off your credit card dues. Your bank doesn’t care as to how you use the loan amount sanctioned to you.
Personal loan also takes the least amount of time and paperwork to be sanctioned as compared to other retail loans. So if you are in urgent need of funds, a personal loan is the way to go.
And the icing on the cake is that unlike other loans, you don’t need to offer anything as security or collateral. You don’t even require a guarantor.
However, before taking a personal loan keep the following 10 points in mind or else the sweet taste of things you enjoy by taking a personal loan will become sour.
Do you have an existing relationship with banks or lenders?
If you hold an account or a credit card with any of the banks offering personal loans, explore the option of borrowing from that bank first. Typically, banks offer lower rates of interest to already existing or old customers. Also, keep an eye out for interest rate discounts during the festival season.
What is the Interest Rate?
Normally lenders just tell the rate of interest that they will charge. This is not sufficient for you to make a decision. Many lenders charge interest on a flat rate while other charge interest on a reducing balance. In flat rate, interest is calculated on the entire loan amount for the full tenure at the said rate of interest and the principal loan amount plus the interest is divided into monthly equated monthly installments (EMIs). While the reducing balance method takes into account the amount of principal that you have already paid and charge interest at an effective rate only on the outstanding principal.
How is the interest charged on your loan?
Lenders usually follow different methods for charging interest rates. Some provide loans with daily or monthly reducing basis other have quarterly or yearly reducing method. If you have just one payment per month the daily and monthly reducing method will equivalent. It is better to have a shorter reducing cycle because in monthly reducing, principal repayments are credited and interest is calculated on the outstanding principal at the end of every month. On the other hand, in annual reducing, interest is calculated on an annual basis on the principal outstanding at the beginning of the year. So, ask the lenders what method they are adopting.
Does going in for a longer tenure helpful?
A longer tenure means more interest payment. Don’t always try to go for a longer tenure as that means you end up paying more interest amount to your lender. Your EMI paying capacity should be the criteria for deciding the tenure once you have decided on a lending institution.
Fixed or Floating rate of interest?
Personal loan or a car loan are offered on a fixed rate basis, but if you need a loan for buying a house, deciding between fixed and floating rate of interest is very crucial. In fixed rate loan the rate of interest charged for the entire tenure is pre-decided whereas in floating rate the interest rate charged is driven by prevailing market rate linked to the Prime Lending Rate (PLR). If you get an option to choose between fixed or floating rate for your personal loan, remember that fixed rate is better if the interest rates are expected to move up.
Is your fixed interest rate is actually fixed?
Generally what appears to be a fixed interest rate is not fixed. This is true generally in case of public sector banks. Actually the interest they quote are the a certain percentage points (called the spread) over the linked to Prime Lending Rate (PLR). Since the PLR can not be fixed, so interest charged on your loan can also be not fixed. But then there are also fixed interest rate schemes available in the market. Read the loan agreement carefully.
What are the charges?
Normally lenders charge an upfront processing fees for your loan application. These upfront fees increase the cost of your loan considerably. For calculating the actual cost of your loan you need to consider the upfront fees charged by the lender.You might also consider the pre-payment penalty, a charge levied if you pre-pay the loan in part or full before maturity. Be sure that you ask and get the pre-payment penalty for both full and part pre-payment documented in the agreement.
Which options to choose when you prepay some part of loan amount?
When you prepay some part of your loan, lender gives you two option – reduction of EMI or reduction in tenure. Always choose for reduction in tenure. Reason? Same as explained above A Longer tenure means more interest payment.
Does paying your installment on time helps?
Paying installments in time creates a positive credit history for you. This enables you to get lower cost loans in future, with fewer question asked. However, defaulting or delaying EMI payments results in poor credit history plus added penalties that add to your cost of borrowing.
How much should you borrow?
Today, loans are available to purchase a vehicle, buy a home, to go on a vacation, for higher education or to buy jewelry for your loved ones. For just about any thing, you can find a loan available. This does not mean that you should start taking loan for anything and everything that you need. The point is that you will also need to repay the loans taken. So, plan your finances and don’t ever over borrow.
He has authored several analytical articles on personal finance in The Times of India and The Economic Times. Being a finance geek and having been involved with internet since the early days of the medium, he was a great help and source of guidance while formulating personalmoney.in. You can know more about Manish at ManishMisra.com
Disclaimer : Manish has agreed to write in his personal capacity. Views, opinions expressed in his articles are his own and do not necessarily reflect the views of his employer.PersonalMoney.in