Not being in the pink of financial health could prompt you to take out a personal loan. And if your financial situation is bad, you may get tempted to take out a personal loan in a jiffy. Although it is not recommended to borrow money without exercising due caution, but if you cannot help doing it for the reasons beyond your control – then the least you can do is to be careful.
Here, we list out seven key factors to be careful about before you decide to take personal loan ‘instantly’.
Personal loan: 7 things to be careful about
I. High interest rates: When you are in a hurry to borrow, there could be a temptation to accept the offer even from a lender which is charging a higher APR (annual percentage rate). One should, therefore, evaluate the APR instead of interest rate since some banks advertise low rates of interest while their APR is high on account of hidden charges.
II. Processing fee and charges: Additional cost that loan seekers could be made to incur is high processing fee. It is recommended to review other charges as well which include late payment penalties and foreclosure charges.
III. Fake or unregulated lending apps: The urgency to borrow money could compel you to explore the prospect of borrowing from unscrupulous lenders. You should, therefore, be extra cautious before engaging with unverified or unregulated lender merely for the sake of ‘immediate dusbursal’ of money.
IV. EMI BURDEN: Another key point to consider is the affordability of EMI (equated monthly instalment). It is recommended to use an EMI calculator to help you check your affordability to repay loan. Ideally, loan repayment instalment should not exceed half of your monthly income.
V. Impact on credit score: Another key point to remember is the impact of your loan applications on your credit score. So, if your loan application is rejected once, you should refrain from applying multiple times in quick succession. This could adversely impact your credit score.
VI. Foreclosure charges: Typically, banks levy foreclosure charges but these should not be high. You should, therefore, opt for a bank which charges low loan prepayment charges. These are calculated on the outstanding principal amount. For instance, when a bank charges 4 percent prepayment charges on an outstanding loan of ₹10 lakh – this would amount to ₹40,000.
Recently, RBI directed banks to not levy foreclosure charges on floating rate loans. You can read more on this here.
VII. Fine print: The loan agent might prompt you to quickly sign the dotted line so that the loan money could be quickly disbursed to your account. However, it is highly recommended to read the fine print before signing it.
Sometimes there could be strict provisions such as high late payment penalties or hidden charges such as loan insurance premium. You should be fully aware of what you are proceeding with.
Disclaimer: Mint has a tie-up with fintechs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
