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5 things to keep in mind before taking a personal loan

  • Shop around for the lowest interest rates as even a difference of a few percentage points can make a significant difference to your EMI
  • It is important to take a close look at your cash flow and figure out whether you can consistently pay your monthly EMIs without putting a strain on your finances
  • Consider prepayment penalty before finalising a personal loan
A personal loan can come in handy when you need money in case of an emergency. Being an unsecured loan, it requires less documentation and is easy to get. But it also means that the rates of interest are very high.

Here are 5 things to keep in mind when taking a personal loan.

Do you really need a personal loan? The first thing to ask yourself is whether you actually need a personal loan. If it is to buy something which you do not really need, then you should avoid it. Even if you need the money for an emergency, consider secure loans like loans against mutual funds, FDs or gold. A personal loan should always be the last option.

Compare interest rates: Since they are unsecured loans, personal loans have high rates of interest ranging from 11% to 24%. This is decided based on several factors like your income, your credit score and so on. Shop around for the lowest interest rates you can get as even a difference of a few percentage points can make a difference to your EMI. You should check with your bank first because they may offer you a good interest rate.

Look at other fees and charges: Interest rates are important, but so are the fees and the charges. There could be processing fees which can range between 0.5%- 2.5% of the loan amount, though in most cases they are capped.

“Also, consider prepayment penalty before finalising a personal loan,” says Abhishek Kumar, founder and chief investment advisor at SahajMoney, a financial planning firm. This is mostly about 2% of the loan amount due if you want to prepay a loan within a certain period.

Check your ability to pay your monthly EMIs
: It is important to take a close look at your cash flow and figure out whether you can consistently pay your monthly EMIs without putting a strain on your finances. “Keep monthly EMI below 35% of one's take-home income,” says Kumar.

Remember, that here a loan tenure plays an important role. If the tenure is high the EMI will be low, but the total interest you need to pay will be higher. So you need to strike the right balance.

Stay away from offers that are too good to be true:
At present, a lot of fake loan apps are doing rounds. They may offer you higher loan amounts, interest rates, side-step necessary documentation, and offer faster disbursals. However, it is important to choose a trusted bank or a loan provider and not fall for gimmicky offers. Otherwise, predatory recovery practices can affect your ability to lead a peaceful life.

Personal loans can come in handy when you need money, but doing the right homework is key for long-term financial success.

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