10 Tips Before Applying for Personal Loan
More and more lenders especially banks, NBFCs and fintech companies are offering personal loan via the Internet, making it easier to get loan online without having to move from home. Moreover, there are lenders offering instant personal loan with just an online application and no paperwork. Applicant needs to just meet the requirements to get an approval.
But it is necessary to know whether the loan you are applying will fulfill the financial need and is cost effective. When applying for personal loan, it is necessary to know all the terms and conditions, interest rates, as all these makes the loan cheaper.
Before Applying for Personal Loan
Below are some important tips when applying for personal loan, which will help in selecting the best lender.
(1) Compare before applying for personal loan
Similar to other financial products, when it comes to applying for personal loan, it is worth comparing different lenders over the Internet, so that it is possible to compare interest rates and other important features. The APR (annual percentage rate) determines the true cost of a personal loan, but you also have to take into account any other charges.
Every lender will claim to offer better rate to the applicant, but it is possible to find cheaper loan elsewhere with careful research through online personal loan comparison sites.
(2) Read the fine print
Before applying for personal loan, check the fine print. Some banks require to have an account with them, a credit card and other financial products. Other financial institutions will not ask for these requirements, but they can offer better deal.
(3) Think about premature loan closure
This may not be possible to determine at the time of applying for personal loan. But don’t forget that you may be able to repay the debt in advance. Many financial institutions will charge an early repayment fee, so it’s must to check how much it might cost before applying for a personal loan.
If you think there’s a good chance of paying off the loan early, it may be worth looking for loan with no prepayment fees. Moreover, there are personal loans that offer the possibility of repaying the money in advance which saves the interest.
(4) Think about payment protection insurance
Payment protection insurance has had little acceptance by clients of personal loan because it is a financial product that increases the cost of the loan but can be a useful product for some people. They are designed to cover payments on loans or credit cards, if borrower is unable to meet payment obligations due to illness or unemployment.
If opting for this type of protection, it is vital to check the lenders that offer it at low cost. It is also highly recommended to fully understand what is or is not covered before finalizing the lender.
(5) Verify Credit Score
If you’re applying for personal loan, it’s crucial to check credit score first. Lenders check this, in addition to the purpose of the loan and income, history of loan used and if you are in any list of delinquents. So if the credit rating is not good, it is possible that the loan will be rejected or you will have higher interest rates.
(6) Consider applying for a credit card
Before applying for personal loan, consider other forms of credit. Credit cards can be a more expensive form of financing, but they have the advantage that they leave no footprints on the credit history, if repayment is done fully on time. However, if you don’t think repayment is possible within the specified time period, it may be better to apply for longer term personal loan.
(7) Check loan from different types of lenders
If you don’t agree with bank’s policies, apply to borrow money from a private lender or fintech companies. For e.g. try P2P lending platforms, which offer the possibility of making the request and connecting to borrowers and lenders, and get good deal on the loan without having to resort to banks or NBFCs.
(8) Sometimes borrowing more can be cheaper
In general, larger the loan amount, lower will be the interest rate. Because of the way some financial institutions manage the cost of their personal loan, there are times when you can actually save money by applying for larger loan.
This becomes more visible while applying for a loan that offers large amount of money compared to mini-credits. In many cases, it is more beneficial to apply for a different loan with a larger amount of money than a mini-credit, since you will pay less interest and make use of money for longer time period.
(9) Don’t apply for too many personal loan
When applying for personal loan, most financial institutions will leave a mark on applicant’s credit history that lenders will be able to check before giving approval. Having a large number of applications on record can make borrower seem desperate or financially distressed. As a result, lenders may see the application as a risk and will less likely approve the loan.
(10) Know the risks of secured personal loan
Secured personal loan are cheaper compared to unsecured loan, but borrower runs the risk of losing the collateral, if payment is not made on time. Secured loans are offered against fixed deposit, insurance policy, gold or any other valuable asset acceptable as a collateral. So it is not recommended to apply unless you are 100% sure of making repayment fully and on time. This type of loan is basically less risky for lenders but more risky for borrowers.
This article has been written by Chandra Mehta.
Chandra is a seasoned banker with 35+ years of experience in banking and financial services industry. He’s a retired banker and has served as Chief Manager and Assistant Vice President in State Bank of India/or its subsidiaries.
He has authored many articles on this site (allonmoney.com).