A personal loan is an unsecured credit facility financial institutions offer their borrowers to fulfil their financial and personal needs. Since this loan is unsecured, it requires no collateral from you. Instead, it lends credit entirely based on your trustworthiness, credit score, and repayment history.
While opting for this loan, you need to compare the personal loan interest rates offered by various financial institutions and choose the best one. Equally, you must follow some basic rules to avail of your loan online.
6 Key Rules to Remember while Opting for a Personal Loan Online
Following are the six main rules one needs to follow when opting for a personal loan:
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Decide the Exact Amount of Loan You Need
Make sure to avoid taking more credit than your need. So, evaluate your finances, income, and repaying capacity before deciding on the loan amount. Otherwise, it will become overwhelming for you to repay. You need to complete the EMIs to ensure your credit score is maintained.
Go with the thumb rule, considering that your aggregated EMI must be restricted to 40% of the net income. Availing of loans of more than 60% to 70% of debt vs. income is an alert sign that you will fall into a debt trap. This will drain up your saving and disrupt your financial health.
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Verify Your Credit Score before Applying
Before allowing you a personal loan, financial institutions verify your credit score, demonstrating your creditworthiness. A good credit score establishes that you have maintained an outstanding loan repaying history, making you a less risky loaner to your lenders. A higher credit score enables you to get a lower interest rate and allows you to negotiate on repaying terms.
Since a personal loan is collateral-free, lenders typically weigh a borrower’s credit score before sanctioning the loan. So, before applying, make sure to check your credit score. Remember that a credit score of less than 650 will lower your loan approval chances.
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Check the Interest Rate and Decide on the Term
The personal loan interest rates determine the number of monthly EMIs. Availing of a loan at a higher interest rate will require you to pay more than your principal amount. Conversely, when the interest rate is low, repaying borrowed money will be less expensive when the interest rate is low. Therefore, applying for a loan that is available at a competitive rate will not only make your EMIs less burdensome but also save money.
In addition, loan tenure is another factor that impacts interest rates. The higher the tenure, the lower the interest, and vice-versa. So, based on your EMI repayment capacity, choose a competitive interest rate and decide on a convenient tenure.
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Compare Loan Offers
The loan offers provided by different financial institutions vary from one to another. Therefore, before applying for a personal loan, remember to research to compare the loan offers from the lender with diligence. Even a negligible difference in the interest rate and other terms like processing fees will likely impact the amount of EMI while increasing your financial burden.
When comparing loan offers, you should consider eligibility criteria, loan disbursal time, customer services, additional charges, etc.
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Calculate EMIs
Before opting for a personal loan, you should compute the monthly installments to repay your loan amount. Some popular financial institutions like Axis Bank offer personal loans. To calculate the correct EMI amounts, you can use the Axis Bank personal loan EMI calculator to get the exact monthly installments and the total interest payable.
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Verify Prepayment Charges
Prepayment of a loan is a highly beneficial option for borrowers to avoid an EMI burden due to the interest rate related to a personal loan. However, you must note that lenders typically charge a percentage as prepayment charges when you foreclose your loan amount partly or wholly before its tenure.
If you have availed of a loan at a floating interest rate, you will not be charged anything for repaying your loan as per the RBI restriction. Conversely, when it comes to fixed interest rates, you must bear a repayment change that varies among lenders.
Now you have a crystal-clear idea about the rules you should follow while opting for a personal loan. Remember that personal loan interest rates and their terms and conditions differ from lender to lender. So, visit multiple websites of financial institutions and research thoroughly before opting for this loan.
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