Thanks to technology, getting a personal loan has never been easier. It is actually pretty commonplace to receive a phone call or an SMS with offers from different lenders — some of them with low-interest rates, quick disbursal and other seemingly amazing perks.
However, before opting for a personal loan, there are some things you should know and consider such as interest rate, tenure duration and the likes. To help you get the most out of personal loans, we’ve compiled this list of 5 important rules as a guide.
1) Aim to Keep the Tenure Short
Do not be tempted to go on a longer tenure on your loan because of lower EMIs (Equated Monthly Installments) because, in the long run, you’ll end up paying a lot more to your lender.
If you keep the tenure short, even though the EMIs would be slightly more because the loan is repaid in a shorter period of time, the overall interest you would pay on the loan won’t be as high.
2) Only Take a Loan Amount you can Repay
Loans are survival tools that come in handy during urgent financial situations. However, to efficiently use the tool, you should always make sure that the ratio of the loan in relation to your income is sensible.
If it isn’t, you’ll end up paying high EMIs, which does not bode well for your other finances. Keeping your loan repayments realistic is also the best way to ensure that you can manage your debt.
As a general rule of thumb:
- Your car loan payment should be kept below 15% of your income
- Your housing loan should not be more above 40% of your income
- Personal loans should not be above 10%.
- The total EMI payout of all your personal loans combined should not be more than 50% of your monthly income.
- And do not delay or miss an EMI because it will negatively impact your credit score and limit your chances of getting another loan at a later time.
3) Get Insurance for Large Loan Amounts
The importance of getting Loan Protection Insurance for large loan amounts cannot be overemphasised. Loan insurance protects your family’s finances by covering loan repayments in the event you are unable to meet up with payments because of a major accident, job loss, temporary or permanent disabilities or death.
4) Compare Multiple Offers Before Choosing One
The charges and rates that come with the various personal loan offers will vary from lender to lender. So, before opting for a personal loan, we recommend looking around and comparing offers. Compare different banks (lenders), interest rates and charges and select the one that best suits your unique situation and income.
5) Read the Fine Print
Before receiving funds from a lender, you will be required to sign a loan agreement. Do not sign it before reading and understanding all the terms of the agreement. Make sure you understand the terms and policies detailed in the agreement, especially those in smaller fonts.
This is the only way to ensure that you are not met with unexpected charges and other surprises down the line.
