We might not always have the funds necessary for our financial needs. In case you do not have the required funds at your immediate disposal, you could consider applying for a loan. You can avail loan through a bank or a Non-Banking Financial Company (NBFC). Loans come with an interest rate and a fixed repayment period. Loan rates, tenure of repayment and loan amount are determined by the lender. You should to check the features of the loan based on your financial health.
8 Factors to Consider while Taking Loan
1. Check credit score before taking loan
Before approving a loan, lenders check your credit report and assess your creditworthiness. In case your credit health is poor i.e. low credit score, the chances of your loan approval take a hit. Hence, it is recommended to check your credit score and credit report before taking loan. If you have a bad credit score, you can look for ways to improve the score. A higher score automatically increases the possibility of loan sanction.
Your credit report is a summary of your credit history, debt repayments and mortgages. It gives insight into your financial status. Credit score is a 3-digit number which acts as a quick indicator of your credit health.
2. Identify the type of loan you need
There are different types of loans available for specific financial needs. Before you apply for a loan, it is important for you to choose a type of loan which is best suited for your requirement.
A few examples of loans are:
- Personal loan:
- financial purposes
- Comes at a higher interest rate than the other loans
- Education loan:
- Offered to students for educational purposes
- Lower interest rates
- Home loan
- Offered to individuals who wish to construct or buy a house
- Car loan
- Used to purchase a car
- Business loan
- Given to an individual who wishes to start or expand a business
3. Choose a lender
- Banks, Housing Finance Company (HFC) and NBFCs offer loans at attractive interest rates.
- Marginal Cost Lending Rate (MCLR),
- The MCLR system is transparent.
- In case of an MCLR-based loan, you can check at the intervals at which the rates would change.
- PLR rates can vary at the discretion of the lender.
- NBFCs tend to be more lenient about your credit score as opposed to banks.
- Consider the pros and cons of both the rate-systems before choosing a lender.
4. Affordable EMI amount
- Equated Monthly Income (EMI) is a fixed payment made towards the loan on a monthly-basis.
- It is inclusive of the interest income.
- It is recommended that all your EMI payments must be under 50% of your monthly income.
- EMI Calculator is an online tool to estimate the EMI value for a loan scheme with a specific tenure and interest rate.
- You can use an ‘EMI Calculator’ before applying for a scheme to check if the EMI outflow aligns with your income.
- Lear the penalties involved in taking loan on credit card.
5. Opt for a short repayment tenure
- Longer the tenure period, smaller is the monthly outflow of EMI
- A smaller EMI amount could tempt you to opt for a longer tenure.
- However, it is advised against opting for a long tenure.
- The size of the total interest payout increases as the tenure increases.
- For a tenure of 10 years, the net interest adds up to almost 57% of the principal amount.
- You can shorten the tenure by increasing the EMI amount when you receive a bonus or salary increment.
6. Timely repayments
- It is recommended to pay your EMI dues on time.
- Late payments can invite a heavy penalty from your lender.
- Your credit score can take a severe hit because of a missed-out payment.
- A poor credit score can hamper chances of availing credit or a loan in the future.
7. Avoid borrowing a loan for investment
- The returns on schemes like Mutual Funds depend on market trends.
- In case of unfavorable market conditions, you might incur losses because of the scheme.
- If you have borrowed a loan for the scheme, you would have to bear the burden of the EMI repayment as well.
- Safer investment schemes such as Fixed Deposits (FDs) have significantly lesser interest rates compared to the interest on the loan.
- Hence, it is suggested to not borrow a loan for an investment loan.
8 Read through the terms and conditions carefully
- It is important to read through the conditions associated with the loan.
- This will give you a fair idea about processing fees, foreclosure charges and late payment fees.
- You can also learn about the flexibility of the terms in case you need to make some modifications in the future.
It is important to choose a loan scheme which is most compatible to your needs and long-term financial well-being. If carefully planned, loans can be a lucrative option to cover your expenses without injuring your savings. However, a loan scheme with high interest rates and inflexible conditions could negatively affect your financial health. Consider BankBazaar to browse all loan products and opt for a loan which is best suited for your needs.