Personal Loan

Personal loan is a lump sum amount that you take either from a bank or building society or another lender. Such loans help you to take care of your immediate requirements without much of a hassle. In fact, personal loan is one of the quickest ways of borrowing money. Also, no questions regarding the end use of the loan are asked. You can use the loan amount for any purpose such as home renovation, marriage expenses, medical expenses, holidays, consumer durable, higher education etc. While applying for the loan, the lender usually conducts a credit worthiness check, before giving the loan. Personal loans are repayable in equal monthly installments (EMI’s) and the loan tenure varies from 1 to 5 years.

Personal loans are one of many types of loans you can borrow from a bank. These loans are typically general purpose loans that you can use at your discretion for things like consolidating debt, pay for an unexpected expense, or pay for a small home improvement project. Personal loans are often more difficult to get and have strict qualification requirements. If you’re thinking about borrowing a personal loan, here are some things you know.



Types of Personal Loan

  • A secured loan is one in which you need to attach a guarantee against the sum of money borrowed. This can either be in the form of your property or any fixed/movable asset. Upon default, there is a risk of the asset being taken over by the bank and sold off.
  • An unsecured loan is one in which no security needs to given for the money borrowed. However, in this case, the lender would be charging a higher rate of interest, taking into account the high risk involved in lending the sum. In case the recipient fails to repay the loan, the lender can seek legal help to make up for the loss incurred.

A Personal loan can be a saviour than a liability depending on how you use it. They are approved quickly with minimum paperwork and do not require any collateral. But, they come with a higher rate of interest than other loans. The following are certain things to do and not to do, that will help you to make personal loans more of an asset than a liability:

The to dos

  • Do your homework
    Keep track of the change in rules with regard to interest rates and prepayment rates, laid down by Reserve Bank of India, from time to time. For example, according to RBI guidelines, institutions can’t charge a prepayment penalty on a personal loan unless the loan is being transferred to another bank.Institutions announce new schemes from time to time, so keep an eye on them. You can take advantage of these schemes and may be able to refinance your loan at a lower interest rate, with minimal processing fees.Compare interest rates, charges, tenures and loan amounts, offered by different banks. Do not just focus on the one which advertises the lowest interest rates. But, choose the one that serves all your needs.Read the terms and conditions and look for hidden charges and clauses. If you have any doubt, ask the loan officer to clarify it.Check whether the interest rate offered is floating or fixed. Check how the interest is being calculated. Different banks use different methods. The best way to compare interest rates is to compare the EMIs for the same tenure and amount.
  • Check your credit score
    A credit rating agency like the Credit Information Bureau (India) Limited (CIBIL) has your credit history and assigns you a credit score, if you have ever taken a loan or used a credit card. You can access your credit information report and find out your credit score, for a fee. If you have a poor credit score (lower than 750), then it might be difficult to get loans at competitive rates. If you have a credit score closer to 900, the probability to get a loan is close to 100%. Check your CIBIL Score
  • Negotiate for a better deal
    You can negotiate for a personal loan on better terms if you have a good credit score. Or if you work with a reputable company. And, if you have a lucrative job. Then, you can drive a hard bargain with your bank or NBFC, on everything from processing fees to interest rates.

The not to dos

  • Do not default on your EMI payments. Choose the loan repayment option you are comfortable with. Make sure you make timely EMI payments over the term of the loan. Don’t be late in paying your EMIs. Defaults and delays will have a negative impact on your credit score, and future loans will become expensive.
  • Be careful while signing any document. Do not sign in without knowing what you are getting into. Don’t be swayed by the sales pitch of loan agents. They have targets to meet and they do not necessarily consider your best interests. Consider all your options and read the terms and conditions carefully, before accepting any offer.
  • Do not make excessive inquiries. Shortlist the bank or NBFCs after doing the required research and only then approach them. Excessive credit inquiries or shopping around for refinancing options once you get your loan, is reflected in your credit history and may adversely affect your credit score.