7 important things to know before taking a personal loan

Have you faced any financial difficulty lately that prompted you to borrow money from a bank or non non-banking financial corporation (NBFC)? If that is the case, one should be mindful of a slew of things, which we list out here. For instance, one should make sure that the interest rate charged on a personal loan is not exorbitantly high, and it should be feasible to borrow money for the purpose you have chosen.

These are some of the key concerns that need to be addressed before you take out a personal loan.

Personal loan: 7 key concerns to address

I. Reason for loan is genuine: One of the key concerns to address is that the purpose of the loan should be genuine. For instance, it is not irrational to borrow money for hosting a wedding, for house renovation, or for an emergency. However, it is not advisable to borrow money for something as avoidable as a vacation.

II. Interest rate: Another important factor to consider is the rate of interest, which varies from lender to lender. The lower the interest, the better it is for obvious reasons. So, it is recommended to compare the interest rates charged by different lenders before you zero in on one of them.

III. EMI is affordable: The monthly instalment, i.e., EMI that you will be made to pay to repay the loan, should be within your budget. It is recommended that your monthly instalment should be within 50 percent of your monthly income.

IV. Processing charges: The borrower should also make sure that the processing charges are not exorbitant. A small percentage of processing charges is acceptable, but some lenders charge as high as 5 percent of the loan amount in the name of processing charges. You should be on the lookout for that.

V.Loan insurance: Some lenders prompt borrowers to take loan insurance, which raises the quantum of EMI. So, you should opt for it only when you are comfortable with the additional loan burden. Otherwise, you should drop it regardless of the degree of nudging.

VI. Reputation of lender: One more factor that is worth considering is the reputation of the lender. One should avoid opting for a lender that has a bad reputation in the market.

VII. Prepayment penalty: Last but not least, you should make sure that the bank does not penalize you heavily for your intent to repay the loan prematurely. Additionally, it is worth mentioning here that the RBI recently announced that the lender must give an option to borrowers who opted for a floating interest rate to switch to a fixed interest rate at the time of tweaking of interest rate.

What to consider before taking a personal loan?

Hence, before applying for a personal loan, you should compare interest rates, check EMI affordability, review processing charges, any hidden costs, and also understand the prepayment penalties.

Further, the lender's reputation in the market, along with the experiences of past borrowers, is another important element that should always be checked. That is why you should borrow only from credible lenders. Borrowing should only be done in exceptional circumstances when you have no other option.

Additionally, as a prudent borrower, you should always read the fine print before signing the agreement. Foreclosure rules, hidden clauses, and insurance add-ons can raise your loan burden.

Utilising a personal loan EMI calculator beforehand assists you in understanding repayment commitments and prevents financial difficulties and defaults later. A composed approach ensures that you borrow sensibly without straining your future finances. 

For all personal finance updates, visit here.

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.