A personal loan can be a convenient financial tool for managing unexpected expenses, funding wedding plans, or making significant purchases. With no collateral required, it offers convenience, flexibility, and accessibility.
However, taking a personal loan without careful consideration can lead to financial strain.
Before applying, it’s crucial to assess factors such as your financial stability, immediate needs, loan tenure, and interest rates. This helps ensure timely repayment and prevents the risk of default or falling into a debt trap.
This article focuses on the dos and don’ts to keep in mind before applying for an instant* personal loan.
Understanding the Dos of Taking a Personal Loan
1. Assess Current Financial Health
Before taking a personal loan, it’s essential to evaluate your current financial situation. This includes assessing your monthly income, mandatory expenses, discretionary spending, existing EMIs, and credit card payments. A well-planned budget will help you determine the maximum loan amount you can comfortably afford to repay.
Well-known lenders such as SMFG India Credit provide a free-to-use personal loan EMI calculator to help you estimate monthly payments and plan your finances accordingly.
2. Understand Loan Terms Properly
Read the loan agreement to understand the terms and conditions. Apart from interest rates, loan amounts, and tenures, check for any associated fees and charges such as processing fees or prepayment penalties. Lenders such as SMFG India Credit transparently list these charges so that you don’t encounter surprises down the road. If you have doubts, reach out to the lender for clarification.
3. Compare Multiple Lenders
Comparing multiple loan providers and conducting extensive research is necessary to find the most suitable option for you. In addition to interest rates, tenure options, and fees, check customer reviews to gauge service quality. Look for features such as paperless applications and quick loan disbursals. Most importantly, ensure the lender is registered with the RBI for added peace of mind.
4. Check Creditworthiness
Most lenders require applicants to have a credit score above 750 for increased chances of loan approvals at competitive interest rates.
Regularly review your credit report and take steps to improve your score if necessary, such as:
- Making timely payments on existing loans and credit cards.
- Keeping your credit utilisation below 30% of the available limit.
- Avoiding multiple loan applications in a short period, which can lower your score.
Understanding the Don’ts of Taking a Personal Loan
1. Refrain From Borrowing More Than You Can Pay
While borrowing, it's possible to be tempted and choose a large amount to fund requirements, especially if you meet the eligibility criteria. However, remember that you have to repay the entire principal amount along with interest.
Larger amounts can lead to increased monthly payments and higher interest costs, which could strain your finances in the long run. Any difficulties in repayment can lead to late payment penalties and a negative impact on credit scores.
2. Avoid Choosing Unverified Lenders
Some lending firms may offer very low interest rates but have exorbitant hidden charges and penalties. Usually, these lenders don’t clearly explain loan details. Along with RBI registration, check online reviews, testimonials, customer ratings and social media platforms for honest feedback on your preferred lender.
3. Don’t Apply for Multiple Loans at Once
During each loan application, lenders conduct a hard enquiry on the credit report, with each enquiry temporarily lowering the score. Multiple applications during a short period can negatively affect the score and indicate an overreliance on credit.
Conclusion
A personal loan can be a valuable financial tool when used responsibly and after careful consideration. By following the dos and don'ts outlined above, you can make an informed decision that aligns with your financial goals. Remember to borrow only what you need, choose reputable lenders, and ensure you have a solid repayment plan. With proper planning and responsible borrowing habits, a personal loan can help you meet your financial needs without compromising your long-term financial health.
*T&C apply. Loan eligibility, loan terms, and loan disbursement processes are subject to the lender’s policy at the time of loan application.
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