A personal loan is a form of debt loan that helps cover your planned and/or unplanned expenses. Despite of being financially secure and stable, there are certain expenses that arise out of nowhere and take you by surprise.
It could be a medical emergency in the family or any other such sudden financial expense that you weren’t prepared for. A personal loan comes handy when you are unprepared for sudden expenses that are not budgeted.
In case certain situations arise where you would have to opt for a personal loan. here are a few things you must keep in mind while applying for a personal loan.
Eligibility Criteria and Credit Score
Your credit score is one of the most essential factors which determines whether you are eligible for a loan, how much amount of loan can be extended to you, and what rate of interest must be charged against the loan. If you are a first-time personal loan applicant, chances are you don’t know your credit score; or, you may not have a credit history at all. There are institutions that may agree to shell out a loan to you on a lower credit score. However, you would have to do the right amount of research for the same.
Understanding the Financial Terms Commonly Used
You don’t have to be a financial expert, but you do need to know the basic terms often used while dealing with personal loans. This will allow you to select the most suitable loan institution to meet your needs. Terms commonly associated with personal loans are EMI (equated monthly installment), interest, foreclosure, etc. It is essential to be aware of how your loan provider calculates the interest for your personal loan and what are the terms to prepay an on-going loan before the end of the loan tenure.
Purpose of the Loan
It is essential to define the purpose for which you are availing a Personal loan. The reason being, with the boon of technology and innovation, lenders have designed personal loans to meet the life stage requirements of individuals. In other words, they have customized personal loans to meet need specific requirements of a borrower. Wedding loan, Travel loan, EMI Free loan, Rental Deposit loan, Personal Overdraft facility, etc, are a few to name. each of these debt instruments is backed up with flexible repayment options. Thus, if your purpose is identified, you may reap the benefit of customized personal loans.
Selecting the Right Loan Provider
With cutting-edge competition, you will find a number of financial institutions and banks extending a variety of loans to their borrowers. However, each one trying to make an offer you can deny. So, it is important to evaluate which provider suits your need and purpose for taking the Personal Loan. Other factors that need to be evaluated are interest rates offered, the flexibility of payment that is allowed, the speed at which the loan is disbursed, the repayment clauses, and foreclosure charges. Ensure that you compare these details among lenders and understand the terms clearly before making a decision.
Check the Loan Tenure
Loan Tenure plays a vital loan in selecting a vendor for your personal loan. Lenders that let you borrow for a longer tenure are always favorable as if gives you the benefit of spreading your loan over a longer period of time. This will ensure that you would have lower EMIs making your loan more affordable to service.
Keep your Documents Ready
If you wish to avail of your personal loan without any hassle and in the quickest possible span, you must understand the documents that your firm would demand in order to make a speedy disbursal against your request. There are many firms that ensure disbursal within 24-36 hours of application provided you hand over the required documents in time.
Know the Applicable Fees/Charges
There is a number of costs that you are liable to pay in order to service your loan. A basic processing fee is chargeable to process your personal loan. You must be well versed with the number of charges associated with availing of the loan. You must all gain all the necessary knowledge regarding the breakdown of your monthly payments. A Loan insurance amount is also a part of the number of charges that are a part of the additional charges. It is insurance that covers your loan amount in case you are unable to complete your repayment for any reason.
Understand the Loan Agreement
You must thoroughly go through the terms and conditions to abide by while availing of a personal loan. This will help avoid unpleasant surprises. It may also give you clarity about the terms of service, foreclosure charges, and other obligations against your loan.
Also Read: Top 10 Reasons to Apply for a Personal Loan
Other Factors to Consider while Applying for a Personal Loan
Apart from the above points, there are other factors we need to pay close attention to in order to improve your chances of approving your personal loan –
Maintaining Good Credit Worthiness
A poor credit score shows that you have been careless with your credit management and can also result in the rejection of your application or you may receive the loan at a higher interest rate.
In order to acquire a healthy credit score, you would require to service your loan on a timely basis. Automating your EMI payments proves to be a good resort for the same provided you maintain sufficient funds in your account.
Credit Utilization Ratio
A Credit Utilization Ratio is a ratio between your used and remaining, available credit limit. If your used credit is higher, your CUR will be high. It has a direct impact on the credit score. Therefore, you must ensure that your credit card usage is under control and within the permitted limit.
Fixed Obligation to Income Ratio (FOIR)
FOIR is simply the proportion of your income being consumed against liabilities or obligations against debts. These include bill payments, credit card outstanding payments, and EMIs against loans. Financial institutions consider this ratio to assess your loan repayment capacity and creditworthiness.
Ideally, if your FOIR, after the new loan EMI, is somewhere between 40-50%, the lender will have little trouble sanctioning the loan to you at a reasonable interest rate.
If you have hands-on awareness about the factors associated with your personal loan, it will help you throughout the process right from application to disbursal and also until you wish to close your loan account.