Personal Loans are awesome and can certainly help when in a financial fix. But know that if a Personal Loan isn’t used and managed wisely, it could lead to financial woes. So before you submit your application for a Personal Loan, read this.
When compared with loans for a specific purpose, such as a Car Loan or a Home Loan; Personal Loans carry a higher rate of interest. The reason is that a Personal Loan is an unsecured loan given without the security of collateral. However, this type of loan is sanctioned without the applicant having to reveal the purpose of use. Pretty cool, huh?
Not so cool if you take a Personal Loan and blow up all the cash on not-always-necessary shopping, an exotic holiday to Mauritius, or gambling in Macau without a solid plan to pay it back. Know that if a Personal Loan can be your friend it can also be a dangerous foe if used unwisely. So, before you submit your application for a Personal Loan, consider the following 5 questions, just to be sure that you have thought things through.
Personal Loan Or Another Type Of Loan?
When in need of money, if the first thing that pops into your head is a Personal Loan, hold it right there. Remember that you might have a few other options to consider. Here’s what you should do. When you visit the bank to inquire about your loan, tell them about your requirement. Not the money requirement, but the reason why you need money. They might have a loan on offer for that specific need. This loan might cost you less than a Personal Loan. If you need money for home renovation, for example, you don’t need to go for a Personal Loan. It might be possible to take a top-up loan on your Home Loan, if you have one to pay for renovation or home furnishing. The blow will be softer on your pocket.
Though a Personal Loan might seem like your go-to option, scout for more options. You might just find yourself a better deal. Moreover, if your reasons for taking a loan are legitimate you shouldn’t worry about sharing your concerns with the lender. Personal Loans are not going anywhere. So look around and only when a Personal Loan appears to be the best solution, go ahead with it.
Will I Be Applying For Another Loan Soon?
When you apply for a Home Loan or Car Loan, you are never funded the entire value of the property you are seeking to purchase. Depending on your eligibility, banks might sanction 80%-90% of the loan. The balance has to be paid from your own pocket at the time of purchase. Now many people, who don’t have the funds to make the down payment, turn to a Personal Loan to make up for this amount. It isn’t a bad idea if you can manage the loan well but remember that you have to service two loans at different rates of interest.
Just make sure that you keep your Credit Score in mind when applying for several loans at the same time. Here are two possible repercussions.
- When you apply for loans back-to-back it has an impact on your Credit Score. It tells the banks that you are strapped for cash and are unable to maintain liquidity. It’s a good idea to keep a good gap between two loan applications. A bad Credit Score has far-reaching repercussions on your reputation. You’ll feel it most when banks reject your loan and Credit Card applications.
- Let’s assume, you will be applying for a Home Loan in a few months. You know that you are eligible to receive 85% of the property value as loan. So, what do you do about the down payment? You take a Personal Loan. Now you think that you are all sorted and apply for a Home Loan. But you get a rude shock when the bank sanctions only 60% of the property value instead of 85%. This is because the Personal Loan hurt your debt servicing ratio (DSR). This ratio is a rule of thumb followed by banks to determine your loan repayment capacity. What you could do instead, is save up the amount for the down payment through an investment vehicle like Mutual Funds.
Am I Rushing Through?
Sometimes a Personal Loan is the best solution to a financial problem. But don’t jump on the first offer that comes your way. It’s important to compare loan offerings from different banks in order to find the best one for you. The good news? You no longer have to travel from one bank to another to search for and compare interest rates. It’s all available online, on one platform.
Don’t know what we’re talking about? Just visit BankBazaar. We’ll help you find the best Personal Loan offerings out there. You can pick your favourites from the list and compare their interest rates, processing fees, and other features.
BB Tip 1: Look out for offers like zero processing and pre-closure fees. See, which one suits you the best and then apply with the click of a button. It doesn’t get easier than that.
BB Tip 2: Other than comparing loans, also keep an eye on news from the RBI. Maybe an interest rate cut is around the corner.
What’s The Best Option?
One of the most common reasons for taking a Personal Loan is to buy long-term, one-time investment products for your home. You know, things like a refrigerator, washing machine, or a king-size bed. The loan amount is not too large and can be repaid in easy instalments. Often, retail outlets partner with banks to speed up the sales of their product. As a customer, you might be wary of Personal Loans offers offered by retailers – suspicious that the retailer could be adding a margin. This is not always true. Sometimes retailers strike a deal with banks that might end up being the most economical. What you can do is let your retailer explain the loan offering to you. Then, come back home and compare it against your Personal Loan offers online. If the Personal Loan is the better bet, then that’s what you should opt for.
If you’re not keen on a Personal Loan, you can consider a Credit Card, some of which provide you with easy repayment options and a multitude of offers.
BB Tip: Consider all options before you take a decision.
Additional Reading: Personal Loan Handbook: All Questions Answered
We understand that when you need something urgently, doing the research might seem cumbersome. But if you think about it, it doesn’t take long to run these checks. A little patience could mean some big rewards! So what are you waiting for?