HOW TO TAKE A PERSONAL LOAN?

Personal Loans can be used for emergencies, business ventures, household improvements, marriages or even taking that well-deserved vacation. When you decide to take a loan, it is a good idea to dig deeper and evaluate factors such as interest rates, processing fees and any other charges like pre-payment penalties.

KNOW YOUR RATE OF INTEREST

The interest rate is the cost of the loan that you need to pay to the lending institution. There are two way of interest calculation that you should be aware of a flat rate and a reducing balance rate.

If a flat rate is quoted, then your rate should not change irrespective of the payments that you make to the lending institution. For example, if you take a loan of Rs 1 lakh with a flat interest rate of 20%, then you will have to pay the lending institution Rs 20,000 as interest per year.

If a reducing balance rate is quoted, then the interest will be applicable only on the outstanding principal and not on the original loan amount. Therefore, with each repayment that you make to the lending institution, the outstanding principal amount gets reduced, which may be more cost effective for you. As a rule of thumb, the reducing rate is almost 2 times the flat rate. However, this will vary with varying tenure- which is why it is important to confirm if the rate is applied on a monthly or annual basis.

Understanding these rates will help you figure out how the loan has been structured for you. Furthermore, when discussing your loan details with the lending representative, it is important that you are upfront and clear. Disclosing the full details of your financials will help the bank or financial institution determines the appropriate lending rate for you.

IDENTIFY ALL THE COSTS

Apart from the interest rate, you need to factor in processing fees, charges, and penalties. Lending institutions typically levy a processing fee. This is a one-time fee that is charges for processing your application and is a percentage of the loan amount. This could vary from 2 to 5 percent of the loan amount and can be negotiated. You should also be aware of other charges like late payment, cheque bouncing, cheque swapping, etc. in case of any ambiguity do not hesitate to seek clarifications from the lending institution.

Some institutions may also offer payment protection covers or loan insurance. These services are optional and may be levied as parts of your monthly payments. However, make sure that you understand the terms and conditions of these services as well and any charges associated with canceling the service.

It is wise to account for every penny when calculating the total cost incurred for the loan. This will also help you prepare for your discussion with the lending representative and compare various loan options.

AVOID PRE-PAYMENT PENALTIES

The duration of a personal loan is typically from 2 to 5 years. So what do you do if you are suddenly flooded with cash and want to use it to prepay the loan? First, ensure that you clearly understand the prepayment terms and conditions as mentioned in the loan document. Then, confirm any pre-payment penalties or foreclosure fees. Typically, lending institutions levy a pre-payment penalty based on your outstanding amount and remaining loan tenure.

As a customer, repaying your loans on time or even earlier will help you build a solid financial track record. Or ganizations like CIBIL are tacking these records and a solid track record will also help you get the best deals when you apply for future loans!