Beginners, experts, and everybody in-between seems to have different opinions about personal loans. Some people look upon this unsecured debt as a bad financial move - one that could result in years of financial burden. Interestingly, for others, a personal loan can be a life saver. Or even better, it can be a smart financial move that can help check off some major life goals without taking on undue financial stress.

So, what do you think causes these wildly polarised opinions about the simple personal loan? The answer, it seems, lies in how well or how poorly an individual plans their borrowings. When done right, availing a personal loan can ease your financial worries and meet any pressing or planned needs in your family. 

But if you should avail a personal loan without conducting your due diligence, you may find yourself carrying on more debt that you can repay comfortably. So, it is always advisable to be aware of the nitty gritties before filling out your personal loan application.

In this regard, here are 5 important things to keep in mind before you sign the dotted line and avail your personal loan.

 

1. Your credit history matters - a lot

A personal loan is an unsecured loan. This means that the lending bank or financial institution has no asset as collateral. So, in case of default, the recovery process can be challenging for the lender. This is why banks look at your credit score and your credit history before approving your application for a personal loan. 

A good credit score indicates that you are a reliable borrower, and it reassures the bank that you are less likely to default on your borrowing. This works in your favour too, because you can enjoy a lower rate of interest if you have a reliable credit history and a good credit score. You can also borrow higher sums in this case. Ideally, a credit score of 700 or above is considered good enough by lending institutions. 

 

2. The tenure of your loan is also important

More often than not, borrowers are so focused on the amount of loan borrowed and the rate of interest thereon, that they forget one other important parameter. And that is the tenure of the loan. If you are planning to avail a personal loan, keep in mind that the tenure is a very important aspect of the borrowing.

Typically, the repayment tenure options offered for personal loans in India range from one year to five years. A shorter tenure means that you will pay less interest overall, although the EMIs will be steeper. But a longer tenure may lead to more comfortable EMIs, even though the overall interest will be higher. So, make your choice of tenure according to your repayment ability. 

 

3. Compare interest rates before you apply

Different banks and lending financial institutions offer personal loans at varying rates of interest. Some personal loans, therefore, are more affordable than others. You can only take advantage of this fact if you shop around for a good personal loan before you rush in to apply. Compare the interest rates from different lenders online, and pick an option that is economical for you.

You can also negotiate the rate a bit if you already have an existing banking relationship with the lender. However, a word to the wise - in your quest for the most affordable interest rates, remember to not compromise on the credibility of the lender. Both these factors are important when you wish to avail a personal loan.

 

4. Prepayment may come with its own charges

You may need a personal loan today. But perhaps you anticipate a huge payout from another investment or asset a couple of years later? And you aim to use those funds to settle your debt earlier than planned? That’s a smart move overall. However, you must remember that prepayment is not always free-of-cost.

Many banks and financial institutions levy additional charges for prepayment of a loan - whether partially or completely. These foreclosure charges may depend on the remaining tenure and the amount of principal that is unpaid. Before availing a personal loan, check the terms and conditions for the prepayment or foreclosure charges, if any.

 

5. You can insure your personal loan

Lastly, did you know that you can insure your personal loan? Yes, that’s right. Many credible lenders in India also allow you to secure your debt with a personal loan protection plan. This insurance cover can come in handy in case something untoward happens to you during the tenure of the loan. In that case, without an insurance cover, the burden of the debt will likely fall on your family. 

But a personal loan protection plan can prevent this from happening. It ensures that your family is not financially burdened in any way. When you avail this kind of insurance cover, you can choose the cover amount as well as the coverage term. In case of your demise during the said term, the insurer will take care of the amount covered under the plan.

Summing up

These pointers can help you make a smart and informed decision about availing a personal loan. Remember that debt, by itself, is not a poor financial product. Good debt can actually help you create assets and/or income for your future. And before you take on any new unsecured debt in the form of a personal loan, ensure that you have a good repayment plan in place. 

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.