Life is a strange conundrum. While propelling ourselves towards our goals, be it sentimental or more worldly, we can hardly escape the finance. Many of us have had to deal with short term requirement of fund at one time or other. Fees payment of current semester to unforeseen medical expenses to three months rental deposit to landlord in a new city upon abrupt transfer, laptop gone phut in the middle of an important submission, so you have to buy one, shortfall in an important purchase there are many situations in life where one is in immediate need of a lumpsum amount despite otherwise sober habits of saving, investing and planning.
Personal loans typically are being offered by standard financial institutions to salaried class, professionals and small businesses having regular job / practice continuously for a reasonable period with valid proof. Some other institutions also offer personal loans to small businesses, but the lending terms and conditions remains tricky to say the least.
One of the most honourable way out in such situations is in form of personal loan. Major features of a personal loan are as under
- Collaterals not required
- A short-term loan spread over 24 to 26 months
- Repayment tenure flexible to your comfort
- Less procedure required than mortgage loans
- Cheaper than for example credit card borrowing
Four factors to look into before applying for any loan in general and personal loan in particular:
- Loan Amount: The financial institution in any case will not lend you more than what you are eligible for, but still, within your eligibility, you should choose the amount wisely. Personal Loan, by default, is a crunch loan, to fill in an occasional gap for an otherwise smooth financial journey. Ideally your loan amount should be sync with your profile to not derail your other financial planning.
- Tenure: Longer the repayment tenure, lower the EMI but higher amount of interest pay-out. One should wisely decide, keeping in view regular income inflow in future the right amount of EMI. A wish to quickly set off the personal loan by choosing to opt for higher EMI may result into chequered Credit Score if the EMI is paid even once.
- Rate of Interest: Though it is said to be cheaper than Credit card borrowing, personal loan remains one of the costliest propositions with ROI starting from 12% to 16 % pa. The cost of your loan should be able to justify the cause foe which it is being availed. Since it is considered a clean loan in finance parlance – a loan without collaterals – Rate of interest is charged on higher side. You should try and evaluate options where you can get it relatively cheaper. Also, lower ROI means affordability of shorter tenure.
- Credit score: In recent times, as the financial sector is getting more and more organised, the tools to identify and segregate the potential borrowers into various categories from unfavourable to favourable also gets accentuated. Credit score is one such tool. You must be very careful about the factors affecting your credit score. In fact, maintaining credit score should be in financial literacy curriculum at high school level. Most financial institutions now link their lending interest structure with the borrower’s credit score. If you have missed your EMIs in past, if credit card you cancelled is keeping on charging you annual fees and you are keep on ignoring it, if you stood as guarantor for an acquaintance who defaulted without your knowledge, you have reasons to worry because your credit score will be affected negatively. It would also mean that you may either be denied credit facilities or end up paying higher prices on your important borrowings like housing loan.
Ideally, one should plan the finances wisely so that the unforeseen exigencies can be taken care of. If one can, one should avoid opting for personal loans. If one has to, then it should be at very last resort as personal loans entail higher interest rates. Above all, the purpose for availing personal loans must be very sound with solid repayment path charted in advance, else it can turn into a misadventure with unpleasant consequences on your