When you don't have the finances when there is an urgent requirement, you opt for a personal loan. Availing a credit facility from a bank is not a difficult task anymore. But, one has to be extremely careful while taking a credit facility, especially a personal loan.
Following are the things you must do while taking a personal loan (Do’s):
- You must first know your payment capacity: You must know where you stand in terms of your finances. You must know how much your monthly expenses and savings are from the income you are earning. Once you know how much you are able to save after meeting your monthly requirements, you can determine how much you can afford to pay towards the loan each month. You can also use the repayment calculators and determine the repayment amount.
- You must have a firm loan rationale: You may have various reasons why you needed the loan. When you are approaching the bank for further credit facility, you must have a solid reason to explain why you borrowed all that money.
- Compare the options available: You must approach various lenders and compare the loans available to you. You must choose the option that suits your payment capacity. You can use the online calculators to determine which would be the best option for you. You will always find a loan that will cost you less if you are shopping around a lot. Do not apply for loan at all the banks. Approach the bank and get a quotation before you apply. Apply only when you are certain that the loan will be approved.
- You must check your credit rating: Your credit report will determine if the bank will lend you money or not. The credit report will have details of your past debts, credit cards, repayments, etc. It also shows where you stand in terms of credit at present. If your debt repayments are more than 50% of your income, you will not get a loan.
- Negotiate with the bank: If you have been a customer at a certain bank for a while, you can negotiate the terms and the rate. The banks will do anything to retain their loyal customers.
- Understanding the terms and conditions: You must read through the terms and conditions in detail. It helps to know the charges and fees that the bank executives don’t discuss. This will help you so you’re not caught off guard when you are charged a certain amount. If you have any queries, you can contact the executive and ask them to explain it.
- If your credit requirement is low, check for alternatives: If you don’t need a huge amount, then you can simply borrow it from a friend or a relative. If you aren’t comfortable asking, you can instead apply for a credit card. Some banks offer 0% interest as introductory offer and this will benefit you as you can split the charge into monthly instalments and not have to pay interest. Sometimes, it is cheaper to get a credit card than taking a loan. Take this option only when you are certain that you can repay the debt within the offer period. But, when you are borrowing from a friend or a relative, you can both come to agreement on certain terms and this will also not affect your credit score in anyway.
Following are the things you must avoid while taking a personal loan (Don'ts):
- Don’t borrow more than you need: Even if you are eligible for a bigger amount than what you require, it is always safe to just borrow what you need. This helps you to stay on top of your loan repayment as you would’ve sorted the payment capacity before applying for the loan.
- Don’t apply for loan with many lenders: The lenders will run a credit check and it will reflect on your credit report. This is not always a good thing as there is a good chance that lenders will want to stay away from offering you a loan.
- Don’t take payment protection insurance if not needed: Payment protection insurance will help you cover the monthly payments if you are not able to for certain reason. But. if you have taken a small amount, you need not incur the extra cost.
- Don’t take a loan from a lender that charges early payment fee: If you are certain that you are able to pay the loan earlier than the term decided on, then look for lenders that don’t charge you an early payment fee.
- Never be late to make your payments: It is wise for you to set a schedule and ensure that you have money in your account to pay for the monthly repayment at any time. Missing payments will be costly as the lenders may increase the interest rate. Therefore, you must always make the payments on time. You can give a standing instruction to the bank so that even if you forget the payment will go on time.
Taking a credit facility is a huge responsibility. Only take a personal loan after you have checked for alternatives. Ensure that you shop around and chose the best option that suits your requirements. Never miss the payments as this will negatively affect your credit score.