Personal loans have made it possible for people to pursue their long-held dreams. Thanks to the easy availability and quick approval process of unsecured loans, it is one of the most preferred channels to source funds. However, you should keep in mind that you are still borrowing money that has to be repaid on time.
Therefore, it is best to consider the following 5 factors before applying for a personal loan:
1. Need a Personal Loan or Want
Ask yourself, do you need it or want it? The money that you are borrowing, is it going to fund a necessity or fulfil a wish? Once you understand the difference between ‘need’ and ‘want’, you are better equipped to make an informed borrowing decision.
2. EMI Affordability
Can you afford to pay the EMI for the entire loan term? If you have other debts and liabilities on your head, then it is wise to reconsider the decision to borrow more money. Personal loan is a safe bet if you have an alternative, stable source of income.
3. Interest Rate and Other Fees
Borrowing money from banks and financial institutions will attract additional charges such as interest, late payment fees, settlement fees and processing fees. These charges differ from person to person, depending on the bank, credit history, loan amount and period.
Compare interest rates of all the banks and ask straight-out about the hidden charges before filling out the application.
4. Loan Tenure
The shorter the loan tenure, the bigger the EMI, and vice versa. Try to find tenure which is best suited for you. Your age, life stage profile, bank’s pre-payment clause, tax relief and inflation are some of the elements that help to determine whether you should opt for a long-term loan or a short-term one.
5. Consequences of Loan Defaults
Perform a worst-case analysis before you apply for a personal loan. What if you fail to pay the EMIs and default on the loan? Do you have a backup, a friend or a family member who can lend you the EMI amount and provide temporary relief?
Carefully consider your options and the repercussions in such a scenario. Ask the banks if the payment terms can be rescheduled or restructured with your financial situation in mind.
Please bear in mind that the purpose of a personal loan should be an indirect investment that assists you in creating a better and secure tomorrow. It should not be a burden, which only increases your liabilities.