Before you take a personal loan, ask THESE 5 questions

Personal loans are complicated debt instruments. They help borrowers in need immensely by providing them with much-needed financial assistance. Still, they come with factors such as high interest rates, hidden charges, rigid repayment schedules, penalties, and a negative impact on credit score, among other associated factors.

This makes asking the right questions of yourself even more critical before going ahead with any particular personal loan.

What exactly is the objective of the personal loan?

• Write down the reason why you need the funds. This reason can be for education, medical emergencies, debt consolidation, child marriage, or other purposes. You must be clear about the fundamental reason behind why you are moving ahead with borrowing.
• Never use a personal loan for leisurely spending or non-essential expenditure, which might burden your finances later on.
• If you are facing a fund crunch, sit down with a certified financial advisor and understand the best possible way out of the situation. Professional guidance can help a lot in improving your overall financial situation, even before initiating any personal loan application.

How much should I borrow, and can I afford the EMI?

• Once you are clear on your personal loan needs, determine the minimum amount you require. This is critical to ensure that you borrow the lowest possible amount, as excessive borrowing can lead to excessive interest costs, legal trouble, and financial complications later on.
• Furthermore, now you must calculate to check if the monthly repayments fit your expenses efficiently. For this, you can use the personal loan EMI calculators provided on the official websites of leading financial institutions. Proper budget planning is critical at this step.
• Understand your repayment capacity and potential honestly. Keep in mind other essential obligations and factor in possible future income changes in computing this. Sincere and honest self-admission can save you from decades of financial pain.

What will be the interest rate, tenure, and total cost?

• Have a clear understanding of the kind of interest applicable to your personal loan. This can be a fixed rate or it can be a variable rate. A fixed rate generally provides flexibility.
• A long tenure on a personal loan will help in reducing the monthly EMI but increase the total interest paid.
• Go through the loan brochure, and ask for the complete break-up of the interest, processing fees, principal, pre-payment fees, etc, before going ahead with any personal loan.

What about my eligibility, lender credibility, and hidden charges?

• Review your credit report and check your credit score. A strong credit score improves personal loan terms and conditions, as it is a sign of a responsible borrower. Any credit score over 750 is considered excellent and provides the borrower with lucrative loan and credit card opportunities.
• Select a lending institution which is credible and registered with the RBI. Go through recent customer reviews, focus on the integrity and the transparency offered by the lending institution, and its history.
• Make sure that all processing fees, any late payment penalties, and foreclosure charges are disclosed to you so that you can avoid surprises later on.

Will this loan impact my long-term finances?

• Acknowledge how the loan aligns with your future financial aspirations and make up for cash flow.
• Take into consideration the worst-case scenario, i.e., job loss, income cut, loss in business, to make sure that the EMI remains manageable and comfortable to repay.
• Only borrow if the loan absolutely strengthens your financial health and does not weaken it. Borrowing on a fundamental level is a rational decision it should not be an emotional decision.

The country's rapid technological development has made securing new personal loans, credit cards, and home loans easier than ever before. Still, the decision to borrow is always the most critical call of all.

Any borrowing decision that overlooks the risks associated with personal loans, such as high interest rates, complex repayment terms, potential legal action, and property confiscation if the loan is secured by collateral, is one of the factors that can make the entire borrowing process unpleasant. That is why, by asking the above questions and doing basic homework, you will be able to achieve far better results with your personal loan.

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Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. Mint does not promote or encourage taking credit as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.