Personal loan pre-application checklist

Personal loan can be taken to finance a vehicle, to take a vacation, to renovate home or to consolidate debt or to meet the expenses of a function or marriage. You can have any reason to take the loan and the bank will not even question you as to how you plan on spending it. Most banks offer instant loan and seem very appealing. But there are so many hidden charges that one has to know before taking a personal loan. Banks charge a processing fee, prepayment charges, late payment charges etc.

The following are the things that you need to consider before opting for a personal loan:

-       EMI that is to be paid:

As personal loan is an unsecured loan, the lenders charge a high interest rate. The interest rate depends on your profile, your repayment eligibility and the income. Banks usually offer personal loan for amounts up to Rs.30 lakhs and they range for 12 to 60 months. It is advisable for a borrower to make use of the online calculators and ascertain the EMI that he will be paying each month towards the loan. The loan calculators will provide detailed information on how much money will go towards the principal loan amount and how much amount is going towards the interest.

For instance, if you are taking a Rs.10 lakh loan at a 12% interest rate and for a 10 year period, you will be paying Rs.14,347 towards EMI. The total interest payable is Rs.7,21,651 ad by the end of 1 years you would’ve paid back Rs.17,21,651. You can make use of the calculators to find the final cost of the loan and you can make the required changes in your finances to afford to make the monthly payments to avoid making any defaults.

-       Other costs:

Read the documents provided by the lender and keep yourself informed about the processing fee, prepayment charges and late payment charges that the lender charges. Some lenders charge a processing fee based on the amount that is taken as a loan, whereas some lenders charge a flat fee. Also, the lender will charge a certain prepayment fee and the borrower cannot prepay the loan before a certain period as mentioned by the lender.

-       Eligibility and documentation:

Most banks require you to show that you have been associated with a bank for 2 years minimum, this is to ascertain that you have a constant salary and can afford to pay the EMI. The banks will require you to a certain minimum salary and the limit is more for those living in the metro cities. You will have to submit address proof, identity proof, bank statements, and the latest salary slips while submitting the loan application.

-       Credit history:

Credit rating and credit history plays a pivotal role in approving the loan application. The lenders use it as a key parameter to decide the rate of interest and he can be aware of the credit habit of the borrower and will know if he can repay the loan. The banks prefer to give loans to those who have a good repayment history and who have a high credit score. They also provide a low rate of interest to those who have a good credit history. So before applying for a loan, check your credit score and if it is not so good, then correct the score to ensure that you will get an approval on the loan. If your credit score is good, then you hold a good leverage and can bargain for a lower interest rate with the lender.

Take a personal loan only if it is an emergency and when you cannot borrow money from your friends and family. If you do take a personal loan, make sure that you have enough finance to pay the EMI each month as a default will cost you a huge dent in your credit score.