The greatest wealth is the poverty of desires! While this saying could work in the ideal world, in the real world we are surrounded by temptations and needs. Whether it is your high end buy or a sudden emergency, personal loans are the fast and easy way out. However, being prudent in borrowing will take you a long way in being debt free.
Here are top 10 personal loan rules you must keep in mind while borrowing:
- Borrow Only What You RequireEven if you can get approved for a big loan amount, control your urge to borrow more than what you can repay with ease. Repaying any loan is always a tougher task than borrowing and more expensive too. As a thumb rule, your total monthly loan repayment amount should not exceed 40% of your monthly income.
- Keep the Loan Tenure as Short as PossibleOn the face of it, a longer tenure looks more tempting because it lowers your EMI. However, it turns out to be much more expensive in the long run because of the additional interest you continue to pay. Try to keep the tenure of the loan as short as possible.
- Make Timely and Regular RepaymentsYour payment pattern of past loans determines your credit score or CIBIL score. Always make timely repayment of your loan to maintain a good credit history. This helps you to avail future loans easily at favourable interest rates. So, as a rule, pay the full amount of EMI before the due date.
- Don’t Take Personal Loan for InvestmentNever use borrowed money to invest or splurge. Personal loans are unsecured loans and hence they come with a very high rate of interest. Even if your investments have guaranteed results, they would not be able to match the loan’s high rate of interest. On the other hand, investments with high returns are mostly market dependent, thus posing a high risk.
- Don’t Go for Multiple Personal LoansIf you go for a second personal loan without closing the current personal loan, the credit bureaus see you as credit hungry. Multiple loans increase your debt and affect your credit score in a negative way. However, if you have multiple loans, it may be a good idea to consolidate your debts by taking a single big loan at a competitive rate of interest. This will help improve your CIBIL score gradually.
- Calculate Your EMI Before Taking LoanBefore taking the loan, if you know your EMI amount, you will have a better understanding of whether you would be able to handle your finances with that EMI. Now days most of the lending institutions have an EMI calculator on their website. You can use this tool to find out the right combination of the loan amount, tenure and EMI which can fit your pocket.
- Examine the Fine Print
While getting a personal loan can be easy, there is more than what meets the eye. Instead of doing a quick casual reading of the loan contract, take time to read each clause and fine print. There are terms and conditions associated with each loan and you should understand what exactly you are signing up for. Read more about the most important terms and conditions of a personal loan.
- Shop AroundBefore making up your mind to go with a certain lending institution, go through there websites to find out the interest rates they are offering. Find out the details like extra processing fee and prepayment costs. Gather the information, compare them and then take a decision.
- Pre-pay the Loan If PossibleThis needs a little deliberation. When you pre-pay the loan, you save on the extra interest you would have paid. However, most banks charge a pre-payment fee. Calculate the penalty you might have to pay, should you pre-pay and then compare it with the interest you would save. If this still feels profitable, go ahead and pre-pay. Pre-payment reduces your debt and helps to increase your credit score. Also, one less debt is always a relief for you. Read more about this here.
- Consider Taking InsuranceIn case of a big loan, it is best to buy a loan protection insurance cover as well. This insurance covers your liability in case of an unfortunate incident which can saddle your family with the payments. Several banks offer insurance to cover the loss of job, accidents, disabilities and unfortunate death. You might want to consider buying this loan protection insurance to be stress-free.