We are living in an atypical world due to the COVID-19. Because of the pandemic, many businesses have been affected or even stopped operating, including small and medium-sized businesses and even street or informal commerce.

This has resulted in people looking for alternatives to overcome the financial downturn. And the economic crisis that has hit the entire world has forced the governments around the world to reduce the interest rate. 

So the natural thought that comes to mind is to take advantage of low interest rates and apply for personal loan primarily to pay off debts, reorganize finances and balance the budget.

But is it worth applying for loan at reduced rates?

Before answering this question, we all have to live with the fact that, predicting the exact end of this crisis is impossible.

We will address some criteria that may help you decide more clearly whether the low-interest loan is an lucrative deal. But before answering this question, it is important that how loans work in general. So that you review your finances before applying.

How do loans work?

The process depends on the type of loan you are applying for. In general, in a loan, the applicant receives the money from a bank or financial institution, committing to repay it by making the established payments in a timely manner, to avoid financial repercussions and late fees. It is considered that all the loans taken must be paid back with the certain interest.

How to take advantage of the interest reduction?

For coming out of existing debt – The expectation is that the basic interest rate will rise again only in the second quarter of 2021. Until then, you can take advantage of this. But the cheaper loan has become an alternative that should be considered by those who want to get out of some existing debt, after all, the more it is accumulated, the more expensive the interest is.

Close high interest loan – By choosing a personal loan with lower interest rates, you can set aside the amount to pay off your old debts, whose interest is higher, and keep only one with lower interest rates.

Negotiate debt – Another option to take advantage of the fall in interest rates is to talk to your creditors and try to renegotiate the debts that are open. The chances of this attempt to work are considerable, because the logic used is that if the market is practicing lower interest rates, institutions tend to offer better payment conditions. Moreover, it is no secret that in the current scenario, it is much better to choose to receive a lower amount than to leave the debt open and take a long time to receive it.

Things to consider before applying for a loan

It is very important to know that when you apply for a loan, you also make a commitment to pay it back. Therefore, if your personal finances have been affected by Covid-19, you should inform yourself about the types of loans that exist before making a decision that can support you in overcoming the crisis.

Applying for a loan during Covid-19 is a good idea, as long as you review your current finances. And keep in mind that if you don’t make the corresponding payments, you can be charged late fees that would affect your credit history. Avoid complicating your personal finances in the future by over-indebtedness.

Decide well and think about your peace of mind. Manage your expenses and payments to avoid your wallet being affected. This way your debts won’t persist after the period of social isolation. And this condition will arise only when you fail to make the EMI payment on time.

Beware of “Loan Trap”

Impact on Credit Score – Now you know all you need about interest rate reduction and how to make the best use of this opportunity. But the reduced interest rates, consequently, will increase the demand for loans and individuals may apply for loans at multiple lenders. But remember that, credit score will take a hit, if you apply for loan at multiple lenders and that too within a short span of time.

Increase in Scams – Moreover, rising applications will lead to scams. So always be aware when receiving calls from financial institutions and do not pass any data before confirming that it is a proposal and do not transfer any value.

Conclusion

In order to apply for a personal loan that really helps you in this moment of crisis, the first step is to understand your financials. The financial planning will help you determine the total amount needed and how much you can allocate to pay the installments.

To help you have more control, stipulate a percentage of your income, so you know the maximum amount you can dispose of in the loan installment.

Author Bio:

Hi, I am Nikesh Mehta owner and writer of this site.

I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business.

I can be reached at [email protected]. You may also visit my LinkedIn profile.