Personal loans can sometimes come to your rescue when you have a cash crunch and need a big amount quickly. You also must have seen various bill boards and online ads by lenders raving about their ‘low-interest’ personal loan products (travel loan, medical loan, education loan, used car loan, wedding loan, home improvement loan and credit card refinancing loan, to name a few) and how they are ‘different’ from the rest. However, it is your responsibility to verify the authenticity of those claims before opting for any loan.
Here are 10 things to do before and after taking any personal loan:
Before Applying for a Loan
Check your eligibility before applying: If your credit card or loan application gets rejected, it is recorded duly by Trans Union CIBIL (and other credit bureaus). This can cause other lenders to be wary of you when you try for loans again. “This is why it is better to check your eligibility first before submitting your personal info and documents. Most lenders have free eligibility calculators to help customers with this,” says Aditya Kumar, Founder & CEO, Qbera.com.
Do not avail personal loans to invest: As unsecured loans, personal loans come with higher interest rates than secured loans like an auto loan or a housing loan. Hence, it is not prudent to take a personal loan to fund your business or buy stocks that may or may not work in your favour.
Borrow what you can afford to pay: Check your current debt-to-income ratio and take a loan accordingly. Ideally, the total EMIs of your debts shouldn’t be more than 40 percent of your income.
Choose shorter loan tenures: Longer tenures suit some loan types while for others shorter terms are recommended. “Home loan terms often last up to 30 years as it is a secured and high amount loan. As personal loans are unsecured in nature, most lenders approve only limited amount (up to a maximum of Rs 5 to 10 lakh), which they expect you to pay over 2 to 4 years,” says Kumar.
Read the fine print before signing: Fine prints exist for a reason and are definitely not to save papers and protect environment. While the transparent part of the deal is specified in bold letters, a couple of shady clauses are sometimes hidden in the fine print. Use a magnifying glass if you must, but please read and understand before you sign.
After Loan Application/Approval
Pay on time and do not skip: You know what a late payment or skipping an EMI means. Your CIBIL score will suffer which will lead to future loan rejections, not to mention getting fined and levied extra interest for each missed day.
Never use retirement funds to repay personal loans: Personal loan EMIs, if piled up, can lead to a lot of repercussions like low CIBIL score, added stress and being chased by loan retrievers, among others. But that doesn’t mean you should break your retirement funds (like the provident fund) to pay off your personal loans. A financially secured post-retirement life is not something to compromise on.
Prepay when possible: Diwali bonus, pay hike, promotion, freelance work, somebody returning the money they borrowed from you… “there could be many occasions like these when you might have extra cash on you. Use them to clear your debts and then splurge or invest the remaining amount. Not only will you be saving on a lot of interest, it is also a huge relief not to shell out money for EMIs from your next salary onwards,” informs Kumar.
Keep an eye on fluctuating interest rates: The base rates often undergo slight changes as per the RBI guidelines, which in turn impact the interest rates imposed by lenders. “You can always refinance your loan if you find a lender that offers better rates. This can save you quite a lot on EMIs. However, before taking a decision talk to your loan manager about it. The extra rate could be waived off if you are the kind of customer the bank wouldn’t want to lose,” says Kumar.
Do not take another personal loan before closing the current one: Applying for unsecured loans one after the other (even if you have adequate income) is not looked upon favourably by credit bureaus. It shows your credit-hungry behavior and can lead to a drop in your CIBIL score. This will make it difficult for you to avail any loan in the future.