It is quite common for people to apply for loans for various reasons. Right from making a higher-end purchase like real estate or cars, to loans for education, the reasons are many.
Though opting for a loan may sound to be a convenient option when needed, payback could be overwhelming. Thus, there is a lot that one has to consider before taking a loan.
When you are sure that you will need a loan, firstly you must understand what loan is. You must also understand the terms and conditions that may vary depending on the type of loan you take.
What is a personal loan?
A financial or personal loan is when you receive the money from a lender or bank on approval from them. In most cases, the lenders determine the sum to lend. However, when you have a specific requirement while you qualify for the loan, you may opt for a smaller amount depending on your need.
Borrowers can also decide on the loan tenure in a few instances based on the rate of interest offered by the lender. You can pay back the entire outstanding amount to clear your debt, or you can make monthly payments in instalments. The latter kind of loans is referred to as long-term loan involving EMIs or estimated monthly installments.
It is imperative to understand that money lending is a business whether it is from a bank or other lenders. It means there are costs involved when you take a loan. Lending money is the means of making extra money in the form of interest apart from the principal amount you borrow. Thus, it is crucial to understand the fundamental terms of a loan like principal and interest.
Tip: While opting for personal loans, choose a trusted lender or bank that offers a very low rate of interest. It is wise to approach two or more banks to understand their interest rates while choosing the one offering the least.
Three main factors determine the rate of interest. The primary being the amount that you borrow, secondly the additional cost of the loan that depends on the interest. Lastly, it is the term, or the loan tenure approved for the loan you take. While in specific scenarios, a few lenders also charge extra for providing you the loan which they usually deduct from the principal loan amount.
After learning about loan fundamentals, the next step involves shortlisting the lenders. It is done by meeting the representative of the lender and discussing your requirement, convenient term, etc. It is vital to meet two or more lenders to understand the difference in their cost of loan, interest rate, etc.
The importance of a low annual percentage rate
Ask for your loan’s annual percentage rate or APR. An APR is an amalgamation of the rate of interest, loan term, and the loan fee or cost. The point to be noted here is lesser the APR, lesser the overall cost of the loan. Thus, choosing the lender with the least annual percentage rate is the key to choosing your lender.
The EMI that you will pay every month until the completion of your loan tenure covers both principal and interest. Before signing on the loan agreement, take a moment to decide whether you could afford the monthly payment or not. If it is within your monthly budget, you can go for the loan. However, failure of timely payment of your loan’s EMI will result in additional penalty and debit charges.
While signing the loan agreement, make sure to read the loan document thoroughly, including the content in fine print. Also, be sure about the loan term and its costs before signing the agreement. In case you are not comfortable with the lender or the loan agreement, do not sign the loan agreement. Often seek advice from trusted friends or financial experts when you are uncertain about certain aspects mentioned in the contract.
When you apply for a loan, the processing may take time. It takes close to 10 or more working days from the day of receipt of your application. In this time, the lender will process your loan application and consider whether to process your loan or to reject your loan. The same is communicated to via email or phone.
Your loan, your legal rights, your lender
Every consumer applying for credit has a set of legal rights which the lender cannot breach. Understanding your legal rights about your loan is thus crucial. The lender is not allowed to discriminate or decide the APR based on your caste, religion, gender, etc.
A lot goes while choosing the right lender to suit your loan requirement. A reliable lender will often provide you with flexible repayment options meeting your needs. Beware of predatory lenders who make use of your vulnerability and desperation. Always make sure that your lender is a legalised firm with relevant experience and credentials.
For starters, associate with a lender who answers all your loan related queries. A reliable lender will have all the elements of the loan drafted in a document or loan agreement. Avoid lenders who encourage you to provide false details for the approval of your loan. Make sure that all your details are duly filled. Do not sign any loan document that has vital information missing in the agreement.
Watch out for lenders who encourage refinancing of your loan. It is also referred to as loan flipping. Often, borrowers believe that loan flipping is in their best interest. Contradictory to popular beliefs, refinancing of loans does not leave scope for reduction of the principal loan amount.
Avoid loans that have deed signing in its agreement. Deed signing is a tactic employed by predatory lenders who aim to take over your property or assets. It is thus crucial to go through the terms of the loan to avoid unwanted risky surprises along the way. Stay away from predatory lenders and opt for established money lenders.
The bottom line is, loans help you make big-time purchases, but getting in blind is a risky financial decision. Do your homework about loans and the best lenders available before taking that giant leap.