Personal loan helps you consolidate any debt that you have racked up. Since personal loan is an unsecured loan, it can come in handy at the time of need. The personal loan amount can be used for any purpose such as to take a vacation, to fund your wedding, to start a business, etc. Personal loan is processed quickly and the amount is usually transferred to your bank account and it enable you to meet your financial requirements. But, there are a few things such as interest rate, charges, etc. that you must consider while taking a personal loan.
Factors to consider while taking a personal loan
The following are the factors that one must consider while taking a personal loan:
- Credit history:
Before you apply for a loan, make sure that you have checked your credit score. If there are any pending dues, pay them off immediately and apply for the loan after the payment reflects in your credit history. If you have settled any loans, there is a good chance you won’t get the loan sanctioned. If your loan does however get sanctioned you will be charged a high rate of profit.
- Profit rate:
As personal loans are unsecured the profit rate charged is higher. The profit rate is higher because the loan has no collateral, the lender has no guarantee of receiving the amount back. Therefore personal loans are difficult to obtain. The profit rate offered is either fixed or variable.
- Repayment period:
Different providers offer different repayment period. Just to get out of debt soon, don’t opt for a shorter repayment period, it will financially strain you and you may get in more debt. Choose a repayment period in which you can comfortable repay the loan.
- Charges and fees:
Check the fine print to learn about the various fees and charges levied on issuance, late payment, missed payment, etc. You will also have to consider the affordability factor of taking a personal loan.
- Check for prepayment penalty:
If you are sure that you will have a certain chunk of money coming in your way in a couple of weeks, but you can’t wait till then and you immediately need cash and hence you have chosen to take a personal loan with the intention of repaying it in a few days. It is important that you know if your provider will charge you any penalty for pre-payment. If the rate is high, try negotiating or try taking a different type of loan that is suitable for your needs.
- Shop around:
Look for deals that different providers are offering you. Always compare the profit rate being offered and the charges you will be charged on taking the personal loan and then choose the best deal.
- Check if you have limit on the use of money:
Most providers do not bother about how you utilise the personal loan amount. The main concern of the lender is how you intend on repaying it. But, it is always safe to understand the possible restrictions you have on using the loan amount.
- See if a guarantor is required:
Since personal loan is unsecured, there is no need of a collateral. But, if your credit score and history is bad, the lender will require a guarantor. If the lender is asking you for a guarantor, don’t take the loan. Fix your credit score and then take the loan after your credit score is high as the profit rate charged will be lower. When you get a guarantor for the loan, the profit rate is high and makes the loan expensive.
- Do not apply for loans at different providers:
If you are applying for a loan at different providers, they will all run a check and it will harm your credit score. Instead you can have a talk with their executive and see if the loan is affordable and the profit rate is not high and apply for loan at providers that you have shortlisted.
If your need for cash is immediate and if you aren’t meeting any of the requirements to qualify for a personal loan, then it is best to ask your family and friends for help. Do not take a loan unless you really need it and it is unavoidable. Do not take a loan to invest in commodities or stock at any cost. Take a loan if you really need to take care of debt or if it is a necessity.