Personal Loan comes to a person’s rescue whenever there is an emergency situation- be it medical or any undeclared expense. It has the potential to bail you out of a situation where you cannot meet the expense. The quick and easy accessibility feature of a Personal Loan makes it the most sought after loan options during an unexpected financial crisis. They are also the best borrowing option for short-term financial needs. However, since such loans come with a high-interest rate baggage, caution and restraint are key before opting for it. So, any error or delay in repayment can result in a heavy outgo, possibly leading to a debt spiral.
Here are five precautions that can help you ensure that your Personal Loan does not become a liability.
1: Say no to multiple loans
The desperation for raising funds in a financial crisis often urges individuals to seek loans from various banks or NBFCs. This is not helpful as multiple applications only reduce the chances of getting a loan sanctioned. With every loan application, banks check the Credit Score and credit history of the applicant. Taking multiple loans could impact the Credit Score negatively and dampen borrowing potential. An individual with a low Credit Score is typically charged higher interest rate than someone with a healthy Credit Score.
2: Don’t borrow more than you can repay
With banks offering pre-approved Instant Personal Loans, it is easy to get carried away and borrow more than your repayment capacity. If your EMI towards the loan repayment is beyond your means, you could land yourself in a bigger financial trouble by having to break other funds or take further loans. One way to ensure your Personal Loan repayment remains within your means is by making sure your loan EMI does not exceed 35 to 40% of your monthly income.
3: Choose loan tenure wisely
Choosing the right tenure for a Personal Loan is important to reduce the burden on yourself. The longer the loan tenure, the higher is the overall cost of repayment for the loan even though the EMI might seem tempting. You must go for the shortest tenure possible for you to afford. The loan tenure must be determined as per your repayment capacity.
4: Ensure timely repayments
You must avoid missing or delaying Personal Loan EMIs as it would attract a penalty for late payment. Regular delays can also impact your credit profile negatively, thus affecting your borrowing potential for future. One way to ensure timely repayment is by opting for an auto debit facility from your bank account towards loan EMIs.
5: Always read the fine print
Legal documents might not be easy to go through but make sure you pay attention while you read through the terms and conditions of a Personal Loan. These documents will help in the event of any dispute between you and the lending institute. As the terms and conditions are different for each bank, it makes sense to compare different loan options before zeroing in on one.
Loans are tricky. They can help you build wealth or drag you to financial misery. Make the best use of them through your financial learnings.
(The writer is CEO, BankBazaar.com)