Questions to Ask Yourself Before Taking a Personal Loan

Last Updated : July 16, 2020, 1:46 p.m.

There are times when individuals need to take a personal loan to fulfill their different financial needs. A personal loan can be taken for several things, be it the upcoming travel plans or buying the latest launched smartphone or funding your child’s marriage, etc. Both Banks and Non-Banking Financial Companies (NBFCs) provide this loan. But before taking out a personal loan, it is essential to ask some important questions to yourself because taking any kind of loan is a matter of commitment and comes with certain obligations. And if you do not take care of the commitment made by you, a personal loan can hurt you financially.

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That’s why it is quite important to ask those questions before taking out a personal loan than regretting the decision of taking a loan without putting much thought into it. By going through this article, you can help yourself in finding the questions to ask before taking out a personal loan and what is the importance of each question. So, let’s dive straight into the questions that are mentioned below.

What is the Interest Rate You can Afford?

As we said, lenders provide the loan amount at a certain interest rate. Personal loan interest rates tend to change from one lender to another and usually range from 8.80% - 26.00% per annum. And this is one of the important things you should ask yourself before taking out a personal loan which will be a suitable rate for you. Interest rates directly affect your repayment amount so it would be better if you get a lower interest rate on your loan amount. As personal loans are unsecured loans, the interest rates are generally on the higher side.

In this particular aspect, your credit score will also play a crucial role as lenders are more likely to provide the low-interest rates to individuals with good credit scores and also process their loan quickly. Apart from this, personal loan interest rates also depend on a few other factors such as your age, monthly income, employment type, job history, etc. We are providing interest rates of some of the top lenders so that you can choose the suitable one for you and get the answer to this question. Check the below table.

How much Should You Borrow?

This is one of the important questions that you should ask yourself before taking out a personal loan about how much loan amount you need. You need to keep this fact in mind that you will also have to make the loan repayment within a fixed tenure. Sometimes, people opt for a loan amount much greater than repayment capacity and what they need. These people usually face difficulty in repaying the loan amount on time that affects their credit score negatively. So, while opting for a personal loan, never let greed dictate the terms and opt only what you need.

But how can you know your repayment capacity? Well, we can get the answer to this question by using the Personal Loan EMI Calculator. This efficient tool helps individuals in estimating the EMI amount correctly before opting for a personal loan. And not only the EMI amount, but you can also know the interest outgo and total amount payable over the tenure. You only need to feed a few basic details such as the required loan amount, rate of interest and tenure. Due to its flexible nature, you can use the calculator for as many times as you want with different values to know the suitable EMI amount. Once you have an EMI estimation, you can make the right decision.

The minimum and maximum loan amount changes from one lender to another. So, compare different lenders to see which is the one that can give you the required loan amount at lower interest rates. If you are a bit confused about what can be the maximum loan amount you can get, use this amazing tool known as Personal Loan Eligibility Calculator . This tool will give you a fair idea about the amount you can get. You only need to feed a few basic details (monthly income, city, age, existing obligations, etc) and you will get the eligible loan amount instantly.

How Does the Loan Repayment Work?

When you opt for a personal loan, you need to repay the loan amount within a fixed tenure via Equated Monthly Installments (EMIs). You can choose this tenure according to your repayment capacity and financial needs. The EMI consists of both a portion of your principal and interest amount. It will be highly dependent on your personal loan interest rate. Higher the rates will be, higher would be your EMI amount and vice versa.

Other than paying the EMI every month, you can also make the full or part prepayment of the personal loan before the fixed tenure to reduce your interest outgo. You will need to pay a processing fee to opt for this facility. The fee changes from one lender to another.

What is the Loan Tenure You Should Go with?

Loan Tenure is the number of years that you will need to pay the loan amount back to the lender. You must ask this question about how much time you will need to repay the loan amount. Usually, personal loans are taken for a maximum of 5 years (60 months). Most of the lenders provide the flexibility in choosing the loan tenure so that you can choose the loan amount according to your convenience and repayment capacity. The most important thing about choosing a tenure is it directly affects your repayment amount i.e. EMI.

The longer your loan tenure, the smaller will be your repayment amount and vice versa. But when you choose a longer tenure, you will end up paying more interest as compared to choosing a short tenure where you will need to pay a higher EMI amount. So, before opting for a personal loan, ask yourself what is the right tenure for you and then decide.

What is Your Credit Score?

A credit score is the most crucial thing when you are looking for a personal loan because of its unsecured nature. Lenders always check the credit score of an individual to see his or her repayment behavior and creditworthiness. If you have a good credit score (700 or above), you have a much higher probability of getting the loan amount as compared to an individual who has a low score. A high score helps lenders in reducing the credit risk they face while borrowing the loan amount. Some lenders also have a minimum credit score to get a personal loan that an individual has to meet.

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So, before opting for a personal loan, it is important for you to check your credit report from any of the leading credit bureaus in India. It will also help you in knowing your credit score. If you feel that there are any discrepancies or incorrect details on your report that have been affecting your credit score, you can resolve any of your credit score issues at the respective credit bureau .

Only after knowing your updated credit score is high should you apply for a personal loan. You can enjoy the benefits of a high credit score, such as lower interest rates, faster processing, quick loan disbursal, minimal documentation, etc.

Are You Fulfilling the Eligibility Criteria and Having the Required Documents?

Each lender has a fixed set of conditions known as the Eligibility Criteria that an individual has to meet successfully to get a personal loan. So when you are thinking of getting a personal loan, you should ask yourself if you are eligible for getting a loan or not. These conditions are usually related to the age of an applicant, monthly income, residing city, employment type, job history, and most importantly, credit score, as we told before also.

Suppose you just joined a new company and want to avail of an HDFC Bank Personal Loan which has a condition that an individual must have 2 years of working experience including a year of experience with the current employer. So, you can’t get the HDFC Bank personal loan. This is just an example to make you understand how eligibility works. That’s why before choosing any lender, you should check if you are meeting their eligibility criteria as they tend to change from one lender to another.

Same as eligibility, when opting for a personal loan, you would need a set of documents such as ID Proof, Address Proof, Income Proof, etc. So, check whether you have all the necessary documents before opting for a personal loan.

Do You Have Any Existing Obligations?

You want to opt for a personal loan but you already have an existing obligation in a car loan/ home loan or any other loan. Any pre-existing loan will directly affect your repayment capacity as in the eyes of the lender. Let me tell you why? When you pay the EMI of your existing loan with a certain portion from your monthly income, you will have a lesser amount to pay the personal loan EMI amount. This may reduce your loan amount a bit as you are already paying EMI of pre-existing loans.

So, until and unless it is really urgent, it would be better for you to opt for a personal loan after clearing all your credit card dues and loan EMIs so that you could get the desired loan amount.

What are the Fees on a Personal Loan?

Before opting for a personal loan, you should also check the fees related to a personal loan so that you can prepare financially for it. Lenders charge a certain processing fee when you opt for a personal loan. This processing fee directly depends on the loan amount plus applicable GST charges on it. You will have to pay this one time fee for your loan processing. You should remember that this fee is non-refundable even if you don’t get the loan. Other than this, there are several other charges that you should keep in mind before taking out a personal loan.

Is an Unsecured Loan Best For you?

You must think about the answer to this question thoroughly. As we told you that personal loans are unsecured loans and by now, you must have known that personal loans have usually high-interest rates as compared to secured loans. However, in the case of secured loans, you will need to pledge some kind of assets against the loan amount you want which makes the interest rates lower as compared to unsecured loans.

There are so many options from Secured Loans that you can opt for such as Gold Loan, Loan Against Fixed Deposit, Loan Against Property, Loan Against Life Insurance Policy, etc. You should see that you cannot get any other loan and a personal loan is the last resort for you as you have to pay higher interest rates on this facility. Put all the factors into consideration before opting for a personal loan.