Personal Loan: 4 Things to Know When Taking a Personal Loan
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It is likely that you get atleast one message every week from a lender offering a personal loan at an attractive rate. The text must also consist of lucrative terms like 'instant approval' or 'no-cost EMI'. And the fact that there is a personal loan available for everything these days—from vacations to gadgets to even buying medicine—has made borrowing easier than ever.
Though experts advice against borrowing for discretionary spends, personal loans come in handy during financial emergencies. In a conversation with Entrepreneur India, Raj Khosla, Founder and MD, MyMoneyMantra.com points out four important things about personal loans that every borrower must check to get the best deal suitable to their needs.
Related Read: 4 Mistakes to Avoid When Taking a Personal Loan
Compare Different Loan Options
When borrowing money, don’t take the easy path of approaching your bank for the loan. Khosla says that it is important that borrowers shop around to find a loan that suits their needs and has a low interest rate.
Calculate Interest Outgo
Khosla says that it is imperative that the borrower calculate the total interest he is going to pay through the loan tenure. “A flat rate of 6-6.5% over a period of 3 years looks attractive, but the total interest outgo is going to be much higher,” he says.
It is a good idea to calculate the interest on reducing balance.
Check the Foreclosure Rules
Though the Reserve Bank of India (RBI) has barred lenders from charging fees on prepayment of home loans, the same rule doesn’t apply to personal loans. Most NBFCs and banks charge a foreclosure fee of 2-5 per cent on personal loans.
“Some lenders allow free of cost prepayment only if the borrower repays the entire loan amount. So, when a lender says that it allows foreclosure, the borrower should read the fine print to check whether part-payment or full payment is allowed and what is the cost involved,” says Khosla.
Impact of Loan on Credit Score
Opt for equated monthly installment (EMIs) amount depending on your monthly repayment capacity. Defaulting on EMIs can affect your credit score adversely. Also, make sure to build a good relationship with your lender so that it reflects well on your credit score going forward, says Khosla.