From emails to messages and even phone calls, you would surely be getting tonnes of offers for Personal Loans and best deals on it; almost too good to be true sometimes. From paying off credit card bills, spending on marriages, to paying off tax debt and the like, they can be utilised for several personal works you wish to complete. This is why these loans can be so tempting. While some financial advisors say that you should stay away from taking personal loans, few others point out on how you can put them to good use. Being unsecured, they are easy to avail and have a faster approval process as compared to other loans. However, there are certain essential things every borrower needs to know with regards to these loans.
1. Should you take them or Not?
This is a million dollar question when it comes to taking not just a personal loan, but any loan for that matter. However, only you would know if you should take the loan or not. Is it because you need it for real or it's just for fulfilling your greed. Before you take a loan, see if you can find other ways of financing your cash crunch. As a thumb rule, you should not take these loans for a long duration. The interest rate charged on these loans is usually high, and thus, make sure you pay back as soon as possible. Also, make sure the loan amount is not more than what you need.
2. High Interest Rate
Personal Loans attract a high-interest rate as it is an unsecured loan. Unsecured means there is no asset of the borrower attached to the loan as collateral. Thus, financial institutions charge a higher interest rate to compensate for the risk they take. The interest rate could be anywhere between 13.5% to as high as 30% depending on your credit history.
3. Hidden Charges
You may have to pay much more than just the interest demanded. Hidden expenses could be a burden later on which you might not be told about during the sales calls. Make sure you are completely aware of all the hidden charges while taking the loan. Not just while taking the loan, you may also be penalised for replaying your loan before the expiry of your loan tenure. In most cases, you cannot foreclose this loan before one year. However, some lenders do not charge any penalty on foreclosing the loan after one year.
4. Importance of Credit Score:
You must keep a check on your credit score. A good credit score can help you avail a loan faster. It can also aid in getting you a higher amount of loan apart from saving you from the tedious procedure of endless documentation. Loan approval becomes easy with a good credit score. Not just that, your interest rate is also decided on your CIBIL score.
5. Interest Rate Types:
There are primarily two types of interest rates; Flat and reducing. Flat interest rates are usually lower than the reducing balance rate. However, do not fall prey to this as the amount of interest is fixed here. Reducing interest rates are charged on the principal balance amount every month which keeps reducing as you pay the EMIs. Thus, while the interest rate in Flat Rate type may be lower as compared to the reducing type, you may end up paying more.
It is important to review and study all the options available to you. Let not your hard earned money go waste. Take Personal Loans only when it's necessary. Once taken, memorise the rates and the hidden costs too.