Personal loans are popular forms of credit, but they come with higher interest rates and stricter eligibility criteria. Financial advisers caution borrowers to carefully assess their needs and limit their loan size and tenure to avoid financial stress.
Here’s a breakdown of do’s and don’ts when applying for a personal loan.
Personal loans: What you need to know before you apply
Personal loans are unsecured, high-interest loans based on an individual’s income and credit profile. Payslips evaluate salaried employees, self-employed individuals are evaluated based on their spending on credit cards, and debit cards. Large banks often restrict personal loans to employees of well-known companies.
Interest rates and loan amounts:
• Interest rates range from 12% to 21% depending on credit score, eligibility, and tenure.
• Banks can offer loans up to 1.5–2 times higher to an applicant each year, but taking too much of your annual salary can put a strain on the economy.
Dos and Don’ts While Applying for a Personal Loan
Dos: Take appropriate steps for secured loans
- Do thorough research: Before applying for a personal loan, compare lenders, interest rates, terms, and associated fees. It’s important to understand your financial needs and ability to pay.
- Check your financial situation: Check your solvency and ensure that your Equated Monthly Installment (EMI) does not exceed 40–50% of your monthly income. Only borrow what you can comfortably afford.
- Maintain a high credit score: Having good credit increases your chances of getting a loan with a reasonable interest rate. Check your credit score regularly and address any discrepancies before applying.
- Verify the terms of the loan: Read the loan terms and Key Facts Statement (KFS) carefully before signing the contract to avoid unexpected fees or circumstances later.
- Check lender’s credibility: Choose a reputable lender with a strong track record. Reading reviews and considering well-known institutions with transparent practices ensures a smoother borrowing experience.
Don’ts: Avoid these common mistakes
- Avoid overborrowing: Only borrow the amount you need. Taking on excess debt can lead to financial strain and a potential debt trap.
- Don’t ignore your credit score: A poor credit score can result in higher interest rates or even loan rejection. Always consider your credit history before applying.
- Don’t rush the decision: Take time to compare and evaluate loan options. Hasty decisions can result in unfavourable loan terms.
- Never default on payments: Missing loan payments damages your credit score and affects your future borrowing capacity. Ensure timely repayment to maintain financial stability.
- Applying for a personal loan requires a careful assessment of your financial needs, credit score, and the lender’s credibility. Opting for a reputable lender with transparent policies, such as Arvog Personal Loans, can simplify the process.
However, your choice should always align with your financial goals and repayment capacity. Make informed decisions to ensure a stress-free borrowing experience.
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