Loans are an effective financial solution during a cash crunch. Many banks and Non-Banking Financial Companies (NBFCs) offer unsecured loans that may be used to finance personal needs. The good news is that financial institutions do not question the intent of borrowing and hence you may use such loans to buy a new vehicle, to make down payment for a new home, to travel to your dream destination, and to pursue higher studies, among others.
A personal loan allows you to fulfill your financial obligations and dreams easily. However, it is necessary to be aware of certain aspects before your borrow such a loan.
Following are five precautions you may keep in mind before applying for an unsecured loan.
Borrowing based on your repayment capacity
It is necessary to determine your requirement for funds and apply for a personal loan only if you need one. Remember, you will need to repay the loan in Equated Monthly Installments (EMIs) over a certain period. It is, therefore, necessary to assess whether your budget allows you to pay these regular installments on a timely basis. A smart move would be to borrow a loan if you are able to plan your repayment judiciously.
Fees and other charges
Banks and NBFCs levy certain fees and charges to service the loan. The basic charge on an unsecured loan is the interest. The interest needs to be paid along with the principal over the loan tenure. Other applicable loan charges include processing fees, stamping charges, overdue interest, and collection charges, among others. It is important to know about such fees and charges while applying for an unsecured loan.
Terms and conditions
Loan agreements come with certain terms and conditions. You may read the brochure or may inquire with your banker about the exact terms and conditions of the scheme. For this purpose, you may read the fine print on the loan document before signing the bottom line.
Attached frills and add-ons
Some financial institutions may allure customers by offering frills at an additional cost. Though these add-ons may seem attractive, it is necessary to identify your need for them. You may thoroughly understand the terms of these frills and seek clarity from the bank regarding this aspect of the loan.
Another important aspect to keep in mind is the tenure of the loan. The period of repayment has a direct impact on the loan amount. Greater the tenure, lower is the EMI and vice versa. You may keep in mind that though a greater tenure would be a feasible option, the rate of interest would be higher. A short tenure is a more cost-effective option as it requires lower absolute payouts. You may, therefore, opt for a short tenure, if your financial position allows you to do so.
Personal loans are a popular option, due to their easy availability, competitive interest rates, and flexible repayment schemes, among others. It is imperative to keep the aforementioned precautions in mind while borrowing such a loan.