With the arrival of a festive season like the current one, our propensity to spend increases. After all, one has to buy gifts for relatives and friends, home needs to be painted and decorated, new clothes are required, new jewellery pieces have to be bought, and sometimes travelling to a far place is also required. All these things need money, and if the amount is large, then one also gets forced to take a loan, sometimes. One also gets tempted to take a loan as banks try to woo customers with lucrative offers during such times, like lower interest rates or waiver of processing fees, etc. However, should you opt for a loan just because you are getting a good offer or there are other things also which should be taken into consideration?
Here’s what you need to do before taking a loan:
#1. Know Your Credit Health
The first thing that you should do before taking a loan is to check your credit health. This begins with your credit score which can be obtained from a credit report. A credit report gives you insights about your current credit status. An excellent credit score can get you loans that are right for you and you will be in a better position to avail lower interest rates and reduce current borrowing costs.
“If you have a poor credit score or a damaged credit history, you should improve it by clearing your past dues and paying your bills or current EMIs on time. Once you gain a good score, your loan application is most likely to get a good deal from the lender.
In case you do not have a credit score, your priority should be building one,” says Ranjit Punja, CEO & Co-Founder, Creditmantri.com.
#2. Take a Loan Only When It Is Essential
You might come across advertisements with alluring offers on travel loans and credit cards. You might also think of taking a loan for a lavish family function or throw a party to your friends or go on a luxury shopping.
A loan might not be the best option for lavish spending. Instead, you can use your savings for such purposes which would cause relatively lesser distress. Remember that a loan always comes with an interest. Spending it for your most essential things in life like buying a house or education will become profitable in the long run.
#3. Read the Fine Print
This might read like a cliché, but a smart borrower, much like a detective looking for prints, peers into the loan document to know the eligibility criteria, add-on charges and penalty charges before deciding upon the loan offer. “A critical factor that every applicant must check on before applying is the eligibility criteria, not meeting requirements would simply lead to a loan rejection. More importantly, every loan application reject reflects poorly on your credit history,” says Punja.
#4. High EMI and Less Tenure
Choosing the loan terms wisely is another important trait of being a smart borrower. Banks offer maximum of 30 years of loan repayment period which comes with less EMI. However, you will be paying double the principal amount as interest during the entire tenure of your loan. Based on your credit profile you can decide to lower your tenure and increase the EMI amount to enjoy low interest rate.
#5. Research and Compare
A loan is a long-term affair and choosing the best one requires a lot of research and analysis. The first step could be that you obtain information from several lenders, including cost, tenure, EMI and terms and conditions.
Secondly, “compare all of them and negotiate with the lenders to get a deal which is suitable for you. Even after availing a loan, you have balance transfer options on your loan to another bank if the rate of interest is low. But make sure you do it at the earlier stage of your loan,” informs Punja.
Precautions Needed to Maintain a Healthy Credit Score
With the festival season around the corner, the announcement of offers on loans with low interest rate and zero processing charges would be a tempting option to get money for your retail expenses. Before taking a plunge, ensure that your immediate requirements do not dent your credit health. Pay extra attention on the terms and conditions before signing and taking a credit.
“While using your credit card for festival purchase, you might lose track on your spending and tend to cross your credit limit. Maxing out on credit cards could affect your credit score. Carrying cash or using debit card for shopping could prevent potential damage on your score. Buying a gadget or luxury item on EMI just because it is on sale with an offer is not a good idea. It can increase your debt burden and late payments will affect your credit score adversely. Calculate your debt to income ratio and do not borrow more than you can repay,” says Punja.
By understanding the thin line between the needs and wants, you can make sensible borrowing decisions. Whatever may be your income, a smart borrowing makes your life easy.