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Getting a personal loan is easy, but it should be used with caution. Before you take it, you should consider these six things that even the banks don't tell you.
Whenever we suddenly need money and don’t have it, we rush to take personal loans. No excessive paperwork, no hassle of keeping providing collateral and money in the account within 2-3 days. That’s why people opt for personal loans. Once you become eligible for the loan, banks are also ready to provide funds immediately. Getting a personal loan is easy, but it should be used with caution. Before you take it, you should consider these six things. These are the things that even banks don’t tell you.
Unsecured loan:
1) Personal loan is an unsecured loan. There is no need to keep any asset as collateral. That’s why the interest rates are quite high. Starting from around 11 percent, it goes to up to 44 percent. When you opt for an expensive loan like a personal loan, talk to at least five to six banks. Negotiate, so that, you can get it at a lower interest rate. Even a slight difference in interest rates has a significant impact on the overall cost of the loan.
According to the websites of various banks, SBI levies interest rates ranging from 11.15 to 14.30 percent. Punjab National Bank charges interest rates between 11.40 and 16.95 percent. HDFC Bank charges interest rates from 10.75 to 24 percent, while ICICI Bank levies interest rates between 10.80 and 16.15 percent.
Other charges
2) In addition to the interest rates, there are also other charges that you have to pay. One of these is the processing fee. A processing fee is required to be paid to avail the loan, it is usually between 1 to 3 percent of the loan amount. Many times, a minimum and maximum amount is also set on the processing fee. Similarly, in the case of pre-payment or foreclosure of personal loans, pre-payment charges are also required to be paid. Not only that, penal charges also need to be paid in case of missed EMI payments. So, before you opt for the loan, you should inquire about all these charges.
Affordability
3) Before you take it, make sure to check whether you’ll be able to pay the installments or not. First, put the loan amount, interest rate, and tenure in the personal loan EMI calculator. This will help you find out the EMI amount. Then analyse your cash flow. Keep the EMI amount as manageable as possible It should not affect your essential expenses and investments. The EMIs of all loans should not exceed 30-40 percent of your earnings.
Tenure:
4) Choose the tenure of the personal loan wisely. A shorter tenure means higher EMIs, while a longer tenure means paying more interest. For example, if you take a loan of Rs 5 lakh at an interest rate of 11 percent for 3 years, the EMI will be Rs 16,369 rupees. You will have to pay Rs 89,297 as interest over 3 years. If you keep a tenure of five years, the EMI will reduce to Rs 10,871 rupees but you’ll have to pay Rs 1,52,273 as interest. Extending the tenure by two years will require you to pay an additional Rs 62,976.
Loan amount:
5) When you apply for a loan, banks check your income, age, job stability, and credit score. Based on this, banks often offer more than the required loan amount. You don’t have to get stuck in this cycle. After you assess all your needs, decide the loan amount and stick to it. The larger the loan, the more you’ll have to pay as interest.
No loan for investment:
6) Don’t rush to take a personal loan in the pursuit of quick profits by investing in the stock market. For that matter you should not invest borrowed money in any unregulated or suspicious schemes. There is a high risk involved. Your investment made with borrowed money may yield poor returns. This means you receive returns on your investment at a rate lower than the rate you pay for the loan. Or, if the money is lost due to any reason, you could find yourself in significant financial trouble.
Personal loan is different from home loan, car loan, or education loan. This is because with a home loan, you build property. With an auto loan, you get a car, and with an education loan, you invest in your future. But there’s no such benefit in a personal loan. Here, you borrow money for personal expenses on which you pay high interest rates. Therefore, take a personal loan only when it’s absolutely necessary. Avoid ignoring the loan amount beyond your needs. Read the terms of the loan carefully. Don’t make decisions in haste. Don’t invest by taking a loan in order to fulfil your desires or earn more returns.