7 rules to follow when taking a Personal Loan

7 rules to follow when taking a Personal Loan


April 24,2019

Today everybody is in need for funds either to purchase a home or for your destination wedding or travel to your dream vacation spot or for some other reason. These reasons may not be met entirely through your salary amount. Hence, you may be necessitated to look elsewhere for the extra amount. What with the surplus balances with the lenders, they are constantly bombarding you with offers of loan. These lenders have also relaxed the eligibility criteria as well as the interest rates. Though it is a cake walk nowadays to get a loan, there are a few things which one has to follow. 

  1. Do a thorough Market Research

Today there are lenders standing in queue with funds to offer you a loan. There may be many calls or emails or even SMS which you are bombarded with from these lenders for loan purposes. Banks and NBFCs are vying with each other in offering you loans. But it will be prudent not to jump at the first opportunity but to do a thorough market research. Even though your own trusted bank is offering you the loan, it would be advisable to do a careful study and choose wisely as to the service offered and the terms and conditions linked to the loan. Then only you may choose your lender. 

  1. Money saved is money earned

You have to keep uppermost in your mind the fact that banks are unbeatable where jugglery of finances is concerned. Most banks will offer you a flat rate of interest which is misleading since with payment of each EMI the balance is reduced and this fact is ignored by the banks. For example, when you borrow Rs 4 lakhs @ 12% for a period of three years you will have to pay Rs. 78,000 making the interest paid back around Rs 26,000. The loan appears to be affordably nice looking. But you are missing the point that the EMIs paid need to be reduced from the balance loan payable which will make the same look more attractive to your pocket. The flat rate does not give you a clear picture of the interest to be paid by you for the loan sanctioned. Thus any amount saved by way of interest goes into your coffers as money earned. 

  1. Stay away from 0% EMI plans

These 0% EMI plans offered by distributors and lenders are an attractive bait to lure unwary borrowers to purchase lifestyle and consumer products. Though RBI has put an end to such plans, there are some lenders who still slyly offer such loans which besr no interest. This interest is offset in some other way, such as high processing fees. The borrower is unwary of the exorbitant charges levied by the lender towards sanction of this type of loan. 

  1. Shirk paying EMIs in advance

Another way that lenders try to get more money out of you is by asking you to pay EMIs in advance. You may be required to pay either 1 or 2 EMIs in advance. If you opt for a loan of Rs 2 lakhs @ 14% for a period of 18 months you will have to pay an EMI of Rs 12,380. But if you were to pay back two EMIs then effectively the loan availed will be only Rs 175, 240 making the rate of interest @ 17.5% and not the 14% assured by the lender. 

  1. Check the fine print

Though personal loans are with only a charge towards processing, some lenders have inculcated other fees in the small print. The processing fee of 1-2% may not appear to be high, but there may be incidental fees charged against the loan. You can avoid any heartburn in future by checking all charges associated with the personal loan toy may decide upon. 

  1. Be aware of rules for foreclosure

The RBI has advised all banks not to levy charges towards foreclosure. But other credit forms may still have penalties charged for prepayment. When you opt for prepayment of your loan, actually you deprive the lender of a part of the interest the lender might have earned. Hence the lenders levy a charge when you foreclose your loan. When the loan is for more than three years and you may expect some cash inflow within the next months, it would be advisable to search for a loan having a low charge for foreclosure of Personal Loan. 

  1. Advisable not to contact lots of lenders

It would help you if you were not to contact lots of lenders as you may damage your credit score. Shopping too much for the lowest rate of interest may be counterproductive to your loan search. Your ability to pay back the loan may be under the scanner when you contact lots of lenders and you may be judged to be hungry for credit. This will spoil your credit rating. It is therefore always advisable to visit a loan portal and then only zero in for your loan and also not damage your credit rating. 

To sum up it would be advisable to do a thorough market research for PL before choosing the lender.  You may know that money saved is money earned and you may have to stay away from payment of any advance amount towards EMIs. Also you have to beware of 0% EMI plans for the lender is sure to compensate by some other means like high processing fees. You should shirk from paying EMIs in advance for the net result is you pay a higher rate of interest. You have to also check the fine print for hidden charges and fees chargeable by the lender. Banks may charge undue fees towards foreclosure of your loan and these charges may be exorbitant. Your credit rating may take a hit if you contact lots of lenders.

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