If you have set your heart on applying for a personal loan, it would do a lot of good if you ask yourself the following questions before scourging the web for one.
Why do you need this loan?
First, ask yourself if you need a loan before proceeding to assess if you really need the loan. Is this loan requirement imperative and imminent? Don’t you have a savings account to dip into for some amount while you look for alternative money sources to pool up the necessary amount? Have you explored every possible avenue, from utilizing your savings to seeking assistance from friends or family, or attempting negotiations with creditors?
To determine whether a loan is necessary, start by evaluating your financial status. Examine your income, expenditures, and outstanding debts. If you find it challenging to cover your expenses or if you’re burdened with high-interest debts, taking out a loan could be a suitable solution for your circumstances.
How much loan do I need?
Taking a loan means opting for a new line of credit. Do not just rush to any nearby bank for a loan or a private lender inquiring about interest rates and loan availability. Prior to embarking on your search for a lender, it’s imperative to perform a precise calculation of the amount of funds you require. This approach ensures that you secure the appropriate loan amount while preventing the accumulation of unnecessary debt.
Here are some guidelines for determining the necessary amount of funds:
List down all your expenses: Do you know how much money you spend each month? What are your essential expenses? Which expenses can you do that? List down all your regular and irregular expenses and corroborate them with your monthly earnings.
Check how much you are left with: After having summed up your monthly expenses to find the total monthly expenditure, deduct your monthly income from your monthly expenses to calculate your net monthly income. Determine the maximum monthly sum you can allocate to loan payments, which should be more than 30 per cent of your net monthly income. Subtract this affordable loan payment amount from the total funds you require, and that will give you the appropriate loan amount to request.
How low can you borrow?
Instead of finding out how much you should borrow, check how much you can do without borrowing. This will automatically help you to calculate how low you can borrow. Initially, it’s advisable to tap into your savings account or consider selling assets to reduce the amount you must borrow. This step can lead to savings on interest and fees in the long run.
If you possess any savings, contemplate utilizing them to cover a portion or the entirety of your loan expenses. This approach can effectively diminish both the sum you need to borrow and the associated interest payments. Additionally, if you have unused items, consider selling them to generate funds. This not only reduces your borrowing needs but also declutters your living space. If you’re comfortable with the idea, don’t hesitate to reach out to friends and family for potential assistance with your loan. They might be willing to provide a loan or assist you in locating a suitable lender.
How soon can I repay this loan?
Will you be able to repay this loan or, most importantly, how soon will you be able to repay this loan sought? The majority of loans come with predetermined timeframes within which they must be repaid before interest begins to compound. This designated timeframe is commonly referred to as the compounding period. Compounded interest is computed based on the entire loan amount, encompassing both the principal and any previously accrued interest. Consequently, the interest on your loan has the potential to accumulate over time, even if you faithfully make your monthly payments.
Understanding the compounding period of your loan is crucial as it enables you to ensure that your payments are of sufficient size to encompass both the interest and principal. In cases where you cannot manage to meet your full monthly payments, there may be an option to make smaller payments. However, this approach may necessitate paying a higher amount of interest in the long term.
Do you have a good credit score?
Prior to applying for a loan, it is imperative to have a clear understanding of your current credit score. Your credit score, a numerical representation consisting of three digits, is employed by lenders to gauge your creditworthiness. It draws from your credit history, encompassing information regarding your previous borrowing and repayment behaviours.
A favourable credit score can secure you more favourable terms and lower interest rates on your loan. Conversely, a subpar credit score might present challenges in loan qualification, potentially resulting in higher interest rates and associated fees. Should your credit history reveal a pattern of unpaid debts, it is probable that your credit score will be less favourable, making it more challenging to meet loan qualification requirements.
How do I gauge my lender’s quality?
Exercising caution in the selection of a lender is of paramount importance. In the lending landscape, there exist less reputable entities that may attempt to exploit borrowers.
To begin, initiate thorough research. Peruse reviews of various lenders to gain insights from the experiences of other borrowers. Avoid engaging with lenders bearing an unfavourable reputation, and leverage online resources that compile information about such lenders. Steer clear of those lenders who insist on collateralizing your assets. Next, diligently compare interest rates and fees offered by different lenders. Solicit quotes from multiple lenders before making a selection. Exercise caution when dealing with lenders who promote loans without credit checks, as they often impose higher interest rates and fees.
Furthermore, exercise caution when encountering lenders who present offers that appear overly advantageous. Should a lender propose a loan with an exceptionally low interest rate or a complete absence of credit checks, it’s advisable to maintain a healthy dose of skepticism. Do not succumb to pressure when it comes to finalizing a loan agreement. If you find yourself uncomfortable with the terms and conditions of the loan, refrain from signing it.
If you harbour any doubts about a specific lender, it’s wise to consult with a financial advisor or a credit counsellor. Their expertise can aid in the assessment of the lender’s credibility and guide you toward selecting the most appropriate loan for your specific needs.
How can I escape taking a high-interest loan?
Loan interest rates exhibit substantial variation contingent upon factors like the borrower’s credit score, the loan type, and the lender itself. A strong credit score generally secures more favourable interest rates. For instance, certain loans like payday loans tend to carry higher interest rates compared to others like personal loans or mortgages. Lenders also differ in the interest rates they offer. Thus, it’s critical to conduct a thorough comparison of interest rates from multiple lenders prior to making a selection.
Below are examples of interest rates for various types of loans:
Payday loans: 30% or higher
Personal loans: 7-36%
Mortgage loans: 3-7%
For the most precise estimation of your interest rate, the recommended approach is to secure pre-approval for a loan. Pre-approval entails a comprehensive assessment by the lender of your creditworthiness and financial details, resulting in an estimate of the loan amount available to you and the associated interest rate.
Getting a loan is easy though it may not be that simple when it comes to repaying the loan amount. Personal loans cost more than most other loans, which is why you must consider myriad factors before applying for a loan. Also, a loan sought is equivalent to debt incurred, which might hamper your financial planning in the long run.
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Updated: 16 Oct 2023, 08:45 AM IST