Things to Know Before Applying for a Personal Loan: A Borrower’s Checklist

Table of Contents

• Why Apply for a Personal Loan?
• What to Know Before Applying for a Personal Loan?
  • Assess Your Borrowing Needs
  • Consider EMI Affordability
  • Credit Score Matters
  • Evaluate Repayment Capacity & Tenure
  • Check Prepayment & Foreclosure Flexibility
  • Multiple Applications
• Conclusion

Why Apply for a Personal Loan?

No one can always be fully prepared for the uncertainties of life. What if there is a sudden financial emergency that demands quick funds? From hospital bills, higher education and weddings to your dream vacation, everything can feel overwhelming without financial backing. Consider a personal loan as that financial cushion which helps you cover urgent expenses without draining your long-term savings. But wait: a personal loan is not only about convenience but also about financial responsibility. You need to evaluate the viability of a personal loan based on factors like credit score, repayment terms, and tenure. Remember, a personal loan can quickly turn into a financial burden if you do not do proper groundwork.

What to Know Before Applying for a Personal Loan?

A personal loan is the go-to solution for quick cash to cover unexpected expenses. Here’s what you need to know before applying for a personal loan:

Assess Your Borrowing Needs

Be clear about the purpose of taking a personal loan. Just because it’s available does not mean you need to borrow. Ask yourself: Why do I need this loan? Whether it's emergency expenses or planned events, defining the fund's use will help you decide the best-suited loan amount, tenure and other terms. Borrowing more than necessary is irresponsible behaviour, as it is only going to increase your EMI burden. Avoid a debt trap through clarity and discipline by understanding how much you truly need to borrow.

Consider EMI Affordability

A personal loan demands your commitment to pay back the loan amount, usually through Equated Monthly Instalments (EMIs). So do not bite off more than you can chew. If you default on your repayment instalments, your credit profile will take a hit, restricting better financial opportunities in the future. A short tenure may offer lower interest but will attract higher EMIs. Use an online EMI calculator to get a fair idea about the monthly amount you would be required to pay. Basically, you need to determine whether you can repay the borrowed amount without hassle or compromising your other lifestyle expenses.   

Credit Score Matters

Your credit score shows a lender whether you are a reliable borrower or not. What's a credit score, you ask. It is a three-digit number that determines your creditworthiness, calculated on the basis of borrowing and repayment history. A high credit score not only increases your loan approval chances but also offers you leverage to negotiate better terms, like a higher loan amount and lower interest rates. An 800+ score is excellent for approval and favourable terms. If you are a New-to-Credit (NTC) borrower, start building your credit score now, as it is usually the primary indicator of your financial reliability in the case of unsecured loans.

Evaluate Repayment Capacity & Tenure

Lenders look for good financial stability to assess your repayment capacity. You should do the same to determine whether you can pay back the loan amount. Calculate your monthly expenses and see how much money is left to pay the EMIs. Also, remember to save some funds for emergencies.

Another key consideration is the loan tenure. Choosing a loan tenure involves preferring affordability today vs tomorrow. For instance, a long tenure will lower your monthly EMIs, but the overall interest cost will be higher. With strong repayment capacity, you can go for a short tenure with higher EMIs and lower overall interest cost. Make a smart borrowing decision by balancing how much you can pay back and how long you want to repay.

Check Prepayment & Foreclosure Flexibility

What if you come across some extra funds and want to clear your debt early? Prepayment entails paying back the borrowed amount before the due date. It can be done either partially or in full (foreclosure). So why do such a thing? Well, prepayment helps in reducing the overall interest paid on your loan amount. It shortens the loan tenure or lowers future EMIs by reducing the outstanding principal. However, not all lenders offer prepayment flexibility and may charge penalties for early repayment. There can also be prepayment fees upfront with some lenders. Confirm if there is a lock-in period? If yes, you cannot prepay during the specific timeframe. So before taking a personal loan, read all the terms and conditions carefully to prevent foreclosure/prepayment charges and penalties.

Multiple Applications

With personal loan offers from multiple banks, NBFCs and other lenders, you may feel applying everywhere for a better chance of approval. Multiple loan applications are a red flag for lenders as it shows your desperation for credit. Also, your credit report is checked for every loan application, also known as a hard inquiry. If multiple hard inquiries are observed on your credit report within a short period, lenders may perceive you as credit hungry. It may lower your credit score, which may hurt your future prospects of securing a loan. So, research diligently and ensure that the bank or NBFC is RBI-registered and weigh different options before the loan application. After that, choose a lender that meets all your requirements.

Conclusion

There is no doubt that personal loans can be a lifesaver if you adopt a strategic approach. Be patient and sure before entering any financial commitment. Have a clear understanding of your current financial stability and future outlook. Compare multiple lenders and choose a credible one. Go through all terms and conditions to avoid any unwanted charges. Being smart is only going to financially secure your future self.