What Should I Know Before Taking A Personal Loan

Written by Vidya Kumar

January 27, 2020

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Summary: Personal loans are unsecured loans. They have a high interest rate and are given to people with high CIBIL score. It is best to avoid a personal loan if it is for a non-emergency or an impulse purchase. Loan against collateral and  building an emergency fund are alternatives to personal loans. 

We can avail of personal loans for emergencies, impulse purchases and investment needs. A personal loan is an unsecured loan available for salaried and self-employed professionals. The rate of interest on these loans is higher as the borrower does not have to provide any collateral. 
Is it a smart move to take a personal loan? What should one know before acquiring a personal loan. Ask these questions before taking one – 

Do I Need It?
If the expense is for a medical emergency or you need money because of a financial setback and you do not have other options, you can consider a personal loan. On the other hand, taking a personal loan for impulse purchases should be avoided. Refrain from borrowing money if it does not play a part in achieving your financial goals.​

How Much Do I Need?
Check the amount you can manage from –

  • Existing funds 
  • Liquidating some investments that do not pay significantly higher returns than the rate of interest on the personal loan
  • Acquire some collateral based loans 

If the amount you require is not enough and there is no other option, consider a personal loan. 

What will be the monthly payout?
Evaluate the amount you have to pay as EMI. Will it fit your monthly budget? Consider one-time processing fees, documentation charges and other fees as well. Here is some data on the interest rate and processing charges of a few banks –

Bank
​Interest Rate
Processing Fees
​ICICI Bank
11.25% per annum to 17.99% per annum
Up to 2.25% of loan amount plus GST
​Punjab National Bank
11.5% –  14.5%
1.8% + taxes
Bank Of Baroda
​11.15% – 14.15%
11.15% – 14.15%
2% or ₹ 1,000 (whichever is higher) up to a maximum of  ₹ 10,000

How soon can I pay the loan off?
When will your loan get over? If you can pay a larger EMI, your loan timeline will be shorter. If you can pay smaller chunks, then the repayment timeline will be longer.

How will it impact my CIBIL score?
The CIBIL score reflects your credit worthiness. If you take a loan of a large amount or do not repay on time, the CIBIL score will be adversely affected. On the other hand, if you take a smaller loan and pay off in time, your CIBIL score will improve.

Alternatives to Personal Loans
It is best to avoid a situation wherein you have to take a personal loan.

  • One way is to build up an emergency fund. You can keep a small percentage of your monthly income aside for emergencies. It can be kept in a liquid mutual fund or savings bank account.  
  • Do not take a loan for non-emergencies such as home renovation. You will increase your debt and not build much of an asset.
  • If you need to borrow money, take a loan against collateral such as loan against FD or loan against shares or loan against salary. The interest rate might work in our favour. 

Conclusion
A financial emergency is a grave situation. If you cannot procure the necessary funds through options better than a personal loan, you will have to consider it. But then understand the cost and other conditions of the loan so that you do not feel that you have made the wrong decision. You can deal with the emergency and repay without apprehensions.

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