Personal Loan Calculators – The Pitfalls

In cases of a tight spot in personal finances, the best credit facility that can come to your rescue is without doubt a personal loan. While going for a personal loan, one often encounters a personal loan calculator. This tool can help you select the loan that would be the best possible one for you, concerning the interest rates, the tenure and the amount of loan. While it is helpful in this manner, one should also be mindful about how exactly the tool works, as being a bit careless in the calculation can land you in a soup. Let’s look at the not-so-obvious quicksand that you need to avoid.

Assumptions and Presumptions about Finances

The interest rate offered on a personal loan largely depends upon your existing credit score, your income and the repayment capacity. Naturally, the EMI figure that you would be arriving at will be a product of the loan amount (principal), the rate of interest and the period for which you avail the loan. The calculation is accurate, depending on the interest rate. But the interest rate, as mentioned before, is not a constant factor. It will change if your income level changes and your personal expenses vary. Thus, even if the EMI figure is mathematically correct, it is just an assumption based on your income and credit history. When your loan is finally processed, you might receive a lower or higher rate. So, don’t assume, if you don’t want to make an ass out of yourself.

Rates Advertised might not be the Rates Applicable

The grass is always greener on the other side or that is what most people think. When you see life-size advertisements about lucrative interest rates, know that the bank might be proclaiming about the least rate that they can offer. Not what they can offer you. That exceedingly low interest rate could be on offer for a person with a monthly income of INR 1 lakh or more. When you would apply for the personal loan and stretch the loan amounts to as high as they can go, you risk increasing the interest rate on the final offer. When the loan application is approved, you might end up with a personal loan with high interest amounts that would be a pain to manage. The basic interest rate on offer is for advertisement purposes only.

The Longer Route is not full of Daisies

The tenure of repayment for a personal loan can be as long as 5 years or as short as a year. Within this period, you might have additional financial liabilities, along with an increased cash flow from your income source. You might be interested in getting a car or a new property through another loan, which will basically add on to your financial liabilities from the previous loan. You could try pre-paying the first loan in order to close it, and end up paying a lot extra every month. That is a sure shot way of ending up in a debt crunch. Thus, when looking for a personal loan and calculating the EMIs through a personal loan calculator, do not use up the entire tenure that is available. Try cutting some corners to make payments in as less time as possible in a shorter tenure.