Raj Khosla
If you need cash in a hurry, a personal loan is a convenient option. Personal loans are faster, easier and cheaper in India than ever before. If you have a good credit score and clean repayment history, you can get a loan in a matter of hours. In fact, offers promising 'instant approval' or 'no-cost EMI' may already be resting in your inbox. Some lenders even claim they can disburse a loan within minutes. But don’t press the ‘Apply Now’ button without assessing the viability of the offer. Here are a few things to keep in mind before sealing the deal.
Don’t borrow more than what you can afford: Take a loan that you can easily repay. Your personal loan EMIs should not account for more than 10 per cent of your net monthly income. Also, your monthly outgo towards all loans should not be more than 50 per cent of your monthly income. Make sure that your loan-to-income ratio is within acceptable limits. If you are paying too many EMIs, other financial goals could be impacted.
Don’t borrow to repay other loans: Avoid taking a loan for repaying other debts. If you are already overburdened with EMIs and are finding it difficult to pay off loans, a personal loan will provide some relief. But this relief will be temporary and will push you deeper into the hole. Only if the interest rate on the new loan is very low compared to the existing loan's charge should you go for this. For example, a loan against property is relatively cheap and an effective way to replace high-cost debt with a low-cost loan.
Choose the lender carefully: Don’t be lured by offers of easy process and very low rates of interest. Compare the rates offered by other lenders before you click ‘Yes.’ Loan aggregator websites help you zero in on the best offer. Even here, don’t just go by the interest rate. Lenders are experts at financial jugglery and will hawk a low rate without telling you that it is a flat rate. Loan rates should be on a reducing balance basis. Instead of interest rate, check the annual percentage rate (APR) of the loan. This is the amount of interest on your total loan amount that you'll pay annually, averaged over the full term of the loan.
Don’t ignore your credit report: While it is a good idea to compare interest rates of multiple banks, too many applications can be counterproductive. Every time you apply for a loan, your credit score is accessed by the respective bank. If you approach too many lenders, you would be seen as a credit-hungry person, thus impacting your chances of accessing loans in future. This is why it makes financial sense to go through a loan aggregator portal to get the best loan without compromising on your credit score.
Understand the math behind offers: There are innovative ways of attracting business. The zero per cent EMI schemes are a clever ploy used by distributors to make the consumer think he is getting an interest-free loan. But the high processing fee and file charges mean that the zero per cent interest is effectively 12-15 per cent. Advance EMIs are another such tactic used by lenders. The borrower is asked to pay 1-2 EMIs in advance at the time of taking the loan. What borrowers don’t realise is that if you pay two EMIs in advance, the effective loan amount comes down even though the EMI amount remains the same. So, the effective interest rate is higher.
Stay on top of foreclosure rules: While banks have been asked by the RBI not to levy foreclosure charges on home loans, other loans still attract prepayment penalties. Lenders charge a fee if you pay off your loan early because their interest income is impacted. Check the foreclosure rules before taking a loan. If the tenure is longer than 2-3 years and you expect your cash flows to improve in the coming months, go for a loan with the lowest foreclosure charges.
(The writer is founder and MD, MyMoneyMantra.com)
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