Things You Must Know Before Applying For A Personal Loan
- 23.04.2021 10:58 am
A personal loan allows a customer to borrow a fixed amount of money for various reasons. Many lending institutions like banks, online lenders and credit unions provide personal loans. You can use personal loans according to your wish. For example, you can use it to buy a new car or expand your existing business. Personal loans are a better alternative to credit cards. Personal loans allow flexibility as you have to pay a specific amount of money every month until you repay your debt. There are many good options like low interest rate personal loans.
Let's understand the loan terms so that it will help you to understand the concept of a personal loan.
- Principal: It is the borrowed amount. If you apply for a loan of ₹ 50,000, then this amount is your principal.
- Interest: The extra amount you pay which is above the principal. It is always mentioned as a percentage rate.
- APR: You have to pay the Annual Percentage Rate (APR) for taking a loan. APR has both the interest rate and any fees of the lender.
- Term: The time period within which you have to pay back the loan.
- Monthly payment: The fixed amount you pay each month to repay the loan.
- Unsecured loans: You do not need any form of collateral to get unsecured personal loans,
Here are the points you should adhere to before applying for personal loans.
- Firstly, decide on the amount of personal loan that you require. This is an important step.
- Then, ask yourself the reason for taking a personal loan. Decide whether you will use the money for debt consolidation or buying new products or expanding your business, or paying off your credit card bills. This will help you in deciding whether you want your lender to send a personal loan to your bank account directly or you will pay the debt of your creditors.
- You will have to repay your loan within a fixed term. You will have to pay a fixed amount each month to your lender. The time period you choose will definitely affect the amount you will pay in monthly instalments.
- Interest rate plays a key role in personal loans. Before applying for personal loans, thoroughly compare the interest rates of several lenders.
- A good credit score helps you to get a loan easily. A credit score is a number between 300–850 assigned by lenders and financial institutions to determine a consumer's creditworthiness. A good credit score will help you to negotiate with your lenders for better interest rates.
- You will pay monthly instalments to pay back your entire loan. Decide whether you want a low or high monthly payment. If you choose a low monthly payment, you will have a long time to repay, but it comes with a higher interest rate. Others choose higher monthly payments as they want to pay back the loan quickly.
- The lenders also take into account the debt-to-income ratio. This number tells us the amount of monthly income a consumer uses to pay off debts. The DTI ratio should range between 35% to 43%. A lender may not accept your personal loan application if you have a DTI ratio above 43%.
- Check if the personal loan lenders are charging any additional fees other than interest. Try to avoid those lenders.
- Also, check when you will receive the funds. If you need personal loans for a medical emergency, you must ensure that you get them within a few hours. For emergency funds, avail loans from lenders who offer quick delivery.
- Check the eligibility criteria of personal loans. It is different for different lenders. Many lenders accept customers between 21 to 55 years. Many other criteria will affect your eligibility.
Benefits of Personal Loans
- Some loans can only be used for a specific purpose. For example, if you avail of a car loan, you can only use it to buy a car. On the other hand, you can use personal loans in different ways.
- Personal loans have lower interest rates than credit cards.
- You can get an unsecured personal loan without any type of collateral. This means you can get a loan without owning a house, car or any other asset. Checkout the best options for loans online.
Drawbacks of Personal Loans
- Personal loans may not offer the lowest interest rate. Borrowers with poor credit scores may have to pay a higher interest rate.
- You can use personal loans to consolidate credit card debt, but they can also increase your debt amount.