One would want to have money to address all his needs. Regular ones and the ones that arise out of blue without any earlier indication. However, that may not be true at all times. One may be required to borrow money if the requirement cannot be met with from the funds available with him. A personal loan is something that usually one falls back upon at such times. But before you apply for that loan, you must apply the following six golden rules. These will help you in prudent borrowing and effective credit management of your loan.
Borrow what you need
The first thumb rule is that you should only borrow what is needed. Many a times, the borrower takes a higher amount than needed just because he is eligible. End of the day, the loan comes at a cost and the additional money borrowed by you is only going to get spent on items that you do not need.
Also you must never borrow money for investment. The borrowing rates in most of the times are higher than the rate of return. Not only this, the return on investments can be volatile while the cost will continue to be same.
Term of loan will impact the cost of loan
The lending institutions are extending loans for much longer terms these days. While it helps borrowers to have a higher disposable income but the fact remains that a longer term results in escalating the cost of loan. A longer term equals to higher interest rate, this is something every one knows, but what you also need to know is that in the initial term of loan, a larger part of the amount from the EMI get apportioned towards the interest. It means that if you wish to prepay or partially pay the loan, it would hike the cost of loan even further. Try to keep the loan term as low as possible. However, do not do it at the cost of money that you would need for regular expenses.
Do not shop around
We Indians generally are highly inclined towards shopping around. But if you are applying for a personal loan, it may turn out to be a bad idea. Do not apply for loans with various lenders at the same time. Please note that all the banks and lending institutions hit the bureau with an enquiry. Multiple enquiries in a short period will only lead to impacting your credit profile. It may also result in rejection of the loan that you are looking at. Then you may be required to check on personal loan for low CIBIL score. There are multiple ways to weigh various offers that the banks would have. You can check the terms of loan on their own website or can compare it over the sites that do it for you.
Check your credit report
It is always a good idea to check the credit report before applying for any loan. Your credit profile is one of the major deciding factors in the decision. And with the fact that the error rates are quite high, it will only be prudent to check it before initiating the loan application. This will help you in understanding the accuracy of data and taking corrective action in advance rather than getting the shock of loan rejection.
Check on EMI and your actual obligations
While the banks follow a 50% rule on income, meaning that including the EMI of loan applied, you should have half of your net income available for day to day expenses. But the bank may not be aware of your actual expenses. So you need to work it out at your end and take loan only to the amount where you would be able to service the EMIs without any default. Please remember that defaulting on personal loans can be devastating and may result in non-access to any form of credit in future.
Check on fine print
Do check on other charges, pre closure charges etc before signing the loan agreement. These can escalate the cost of your loan.
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