Let me begin this article by stating just how popular personal loans are. If data is to be believed there are more than 20 Million Americans that have Personal Loans.
In the last few years, a lower rate of interest has made personal loans more attractive than credit cards. When it comes to making big purchases during marriages, childbirth, and other important life events, a lot of people prefer personal loans as opposed to using their credit cards.
No matter what kind of a loan you are seeking, it is essential that you follow the principles of financial discipline. This means that you should always have a sound and regular income that would create a hassle-free repayment schedule.
In this article, we look at five important questions an individual should ask themselves when applying for a personal loan. Before we get to the list of questions, let us first look at what are personal loans.
Personal Loans: Meaning and Definition
According to UK Credit, personal loans are small sums of money that are given away by banks and financial lenders. The important thing to note is that the small sums of money often come with small repayment periods and average rates of interest.
The highlight of a personal loan is that it is easily available without any collateral or rigorous paperwork. This means that banks are not going to ask you for hundreds of documents. The only they will look at is a credit score and income proof.
Since this is a low-volume loan, the risk factor for a financial institution is relatively smaller. Personal loans are quick, simple, and can be disbursed on the same day itself. In recent years, they have become very popular especially among millennials.
List of 5 Questions to Ask Yourself before Applying for a Personal Loan
1. Do I really need to take a Personal Loan?
The first and probably the most important question that you should be asking has a lot to do with financial discipline. In other words, what is the motive with which you are taking out the loan? If it is for a vacation, or buying a new PS 5, you should look at aggressive savings and not at a personal loan. A personal loan is best for emergencies and not for luxuries or conveniences.
2. How much money do I need from the Personal Loan?
Many people who take out a personal loan factor in two main things- the sum of money I need and what can I do with a little bit extra. In other words, you might need the money for something important. But you get greedy and try to factor in something extra. This will increase the loan amount unnecessarily and consequently lead to more months of repayment interest.
3. Is my Income Sufficient to Pay Monthly EMIs for the Personal Loan?
Before you apply for a loan, thinking about how you are going to repay it is financially prudent. If you take too big a sum as a loan, you will have to repay a lot of money with interest. Experts point out that your monthly EMIs for loans should never exceed more than 25% of your monthly income. This will ensure that you are not missing out on monthly repayments.
4. What is the Term Period of the Loan and Interest Rates?
A common mistake that most applicants go for is extending the period of repayment and reducing the monthly payment. While you may think that you are ending up paying nothing, once the personal loan is completed you will see that you have paid over and extra. This is why it is best to go for smaller periods so that you can get the personal loan repayment done.
5. Are there any Hidden Fees or Origin Commissions on the Loan?
Banks and financial lenders are smart to charge a 1% to 5% fee under heads of processing, administrative, and origin. You need to ask the bank about the same. Try not to pay anything that is over 1% of the entire loan amount. For example, if you are taking a loan for $1000, banks will charge 1% ($10) and transfer $990 to your checking account.
Major Personal Loan Mistakes you should avoid making
A lot of individuals that apply for personal loans often end up making some elementary mistakes. This costs them everything from poor credit scores to higher interest rate payments as well as additional penalties. Let us look at some of them below:
Not Paying the Monthly EMIs on time
When it comes to personal loans, repaying the EMIs on time is something that you cannot afford to miss. For starters, this can invite a penalty that would be over and above the EMI amount. Secondly, it can also damage your credit score and get you into the bad books of the bank or lender you are availing of the loan from.
Going for Longer-Term Repayment Period
Many people prefer personal loans simply because you can get a repayment period of anywhere from six months to seven years. People prefer longer repayment periods simply because they feel that the monthly EMIs are not going to stress their financials. However, experts recommend that you should opt for shorter repayment periods and close it out.
Missing the Fine Print of the Agreement
Make no mistake, personal loan documents are agreements that can stretch to tens of pages. sometimes we are in such a hurry to just collect the money, we do not read the fine print. Banks and financial institutions can resort to unfair and exploitative means including issuing huge fines and penalties for missing payments. It is essential that you read the agreement.
Choosing the First Lender that agrees to give you the Personal Loan
As someone who is applying for a personal loan, you should take proposals from multiple banks and lending institutions. You should only select the ones that offer the lowest rates of interest. Banks want to disburse the loans as quickly as possible because it is advantageous for them to catch someone in an exploitative position. Evaluating options is necessary.
The Final Word
Rather than put 10 questions to the lender, you should start the process with yourself. At the end of the day, you are the one who is going to avail of the loan and repay it. Asking yourself the above-mentioned questions can help you get a clearer idea about the personal loan application process and the financial discipline that is required for the same. If you have any other questions in mind that you want answers for, drop them in the comments section below.