What to Consider Before Taking Your First Loan

You can always take a personal loan to get some extra cash when in need. Perhaps you have a home improvement project, need the money for your dream wedding, are planning a long-dreamed-of holiday, want the money for debt consolidation, or it’s a way to manage an unexpected expense. A personal loan is a flexible credit option that helps you meet different needs.

However, it is good to be cautious when applying for the extra cash, especially if it is your first personal loan. Remember, taking any loan is a major financial decision. As a borrower, you must understand the basic concepts and details, such as the applicable interest rate, loan term, processing fee, and prepayment penalty. This information will help you make an informed decision. You will know what to expect.

What Is a Personal Loan?

A personal loan is an unsecured loan that is issued without any collateral, like a house or car. You can use the money for various needs, like education, wedding, travel, debt consolidation, medical emergency, or any personal expense. Basic eligibility will depend on your monthly income, repayment history, credit score, and perceived ability to repay on time.

On approval, you will get a fixed sum of money and must repay the loan through a pre-decided number of fixed monthly installments or EMIs. The amount to be paid each month will include both the principal amount and interest.

Key Considerations Before Applying For The Loan

Here’s what you should keep in mind while taking out a personal loan –

1. Purpose of the loan – Yes, you can ask for the money for any purpose, but it is still important that you have a clear understanding of why you are applying. When you clarify the purpose, you will have a better understanding of how much money you need and the duration. This will help you decide on the most suitable loan option. There are many loan options for any credit. For example, you can take a payday loan, a bad credit loan, an advance on your credit card, and of course, a personal loan.

2. The loan amount – Decide on the amount you need. Never borrow more than what you need, as a higher repayment amount will put unnecessary financial strain. Each EMI payment will be higher, on account of both the amount borrowed and the interest. For instance, if you need $2000 and borrow $5000, the extra amount might be tempting, but remember, it will come with an added repayment responsibility. So, always calculate your requirement precisely and repayment capability, and ask for the exact amount you need.

3. Interest rate – Lenders will offer a fixed or floating interest rate. The fixed rate plan will stay the same throughout the term of the loan, which means the EMI amount will stay the same. On the other hand, the floating rate will fluctuate with changes in the market. This may affect your monthly amount. So check while applying. Also, remember, the interest rate may vary significantly from one lender to another. Read the offer document carefully to notice the differences. Also, some lenders may charge a lower rate, but there can be additional fees. Get the bigger picture before applying.

4. Tenure of the loan – Try to balance the EMI payment amount and the total interest cost. A longer tenure will lower your monthly payment amount, but the cost of overall interest will be higher. A loan tenure of 5 years may seem attractive as the EMI amount will be significantly lower, but the overall outflow will be much higher compared to a loan for 3 years. A shorter tenure will reduce the total amount you must repay.

5. Processing fees – Most lenders will charge a one-time processing fee, which is a percentage of the loan amount. However, this percentage can vary between 1% and 2%. It can be as high as 3% with some lenders. The fee amount will be deducted from the loan amount you will get, which means you will get a slightly lower amount. Find out whether you can negotiate the processing fee. The fee can even be waived if you have a high credit score.

6. Disbursal time – When you will receive the loan depends on the process the lending agency is following, which includes documentation and verification requirements. Many will disburse in 3-4 days, while others may take longer. If you need the money quickly, you may even consider a payday loan, which is disbursed within 24 hours. Missing or incomplete documentation can delay the process, so you must be careful while applying for the loan.

7. Eligibility criteria – This varies from lender to lender. However, most will consider your employment status, monthly income, and credit score. Some lenders will offer an attractive rate to people with a score of more than 750. For those with a lower score, the application may be rejected or the interest rate might be hiked. Confirm your eligibility always before applying.

8. Pre-payment option – If you think you may be able to repay the loan earlier, then check whether the lender will allow this without a penalty. Some lenders will charge for an early pre-payment. This will diminish the benefits of paying off the loan sooner. For example, you may consider prepaying part of the loan to save on interest money if you gain a windfall income or bonus. Make sure the lending company’s policy allows pre-payment to your benefit.

A personal loan can be the right credit option once you have addressed the above-mentioned key considerations. Your loan journey will be easy if you focus on what matters the most and find the right lending company.