People need money. All the time. At times for good things. And at times, for not such good ones (like medical or financial emergencies). So there is this constant worry that many have whether they would have enough money to pay for big-ticket expenses quickly.
If you already have an emergency fund in place, then you are quite well prepared for such unplanned and unavoidable expenses. But if you don’t have a savings buffer to fall back to, then come your family/friends who you expect will pitch in times of need. But what if they can’t?
You will need to borrow.
It may not be the best option but if you don’t have other options, then that’s what you got to do. And you try to get yourself the best deal.
Personal loans are something that you can get quickly. In fact, in a matter of minutes via new-age tech-enabled lenders. And even though personal loans are costly compared to other loans (like home loans, gold loans, etc.), it’s still much better and affordable alternatives to credit cards.
By the way, if anyone has doubts about what exactly is a personal loan, then there is help at hand. The Reserve Bank of India has made it pretty clear what a personal loan is. If interested, do read about it on the RBI website.
A Personal loan can come in handy to help you tide over a temporary financial crisis. You get (almost) instant access to the loan amount. You don’t have to put in efforts to bring in any collateral. Ofcourse this means that the loan will be an unsecured loan. But when it comes to emergencies, the quicker you get the loan amount, the better it is.
I am sorry that I have only been talking about emergencies like medical or other financial emergencies and why you should only take a personal loan for emergencies. There can be other reasons too for you to borrow. Ofcourse, it’s advisable to not borrow unnecessarily and for discretionary expenses like gadget purchase, holidays, shopping, etc. but I don’t want to take a moral high ground here. The basics of personal finance are pretty simple. But if you think you really need to borrow to spend, then that’s fine. Your money your life.
So with that said, let discuss a few important points that you should keep in mind when planning to take a personal loan:
- Do some primary research on loan aggregator websites to find out the personal loan interest rates being offered to you. Different lenders will offer loans at different rates. Never apply for the first loan offer that you get. If you shop around a bit, you are bound to get lower-rate personal loans. By the way, the interest rate is not the only thing. You also need to ensure that the lender is lending you the required amount. Suppose you need Rs 5 lakh but a lender is only giving Rs 3 lakh at 11%. And another lender is giving you Rs 5 lakh at 12%. So you are sure to go with the higher interest rate option as it gives you the amount you need. Isn’t it?
- Interest Rates – This is a no-brainer. Lower the better. But be sure to understand the type of interest being charged by the lender. Flat loan rates may look attractive but you may end up paying more for interest rates. Better to go for a loan where the rate of interest on EMIs is calculated on the reducing balance method.
- Credit Score – The higher your credit score, the better it is for you as a borrower. You will be eligible for higher loan amounts and lower interest rates. Most lenders factor in the credit scores while setting the interest rates. Those applicants with good credit score are offered personal loans at lower interest rates and vice versa. Hence even if you don’t need a loan now, make sure to maintain your credit score above 750 or even more. By the way, these days many new lenders do not just depend on credit scores as many young applicants have no credit history at all. They even lend to the first-time borrowers after analyzing their social credit rating systems.
- Processing Fee – Loan providers charge a processing fee, which is a one-time cost. This could increase the cost of your loan. Compare the processing fees charged by different lenders to ensure that your loan is affordable.
- Pre-Closure Fees – Some lenders may charge you a pre-closure fee if you pay off the loan amount before the end of the repayment period. You should check to find out if your financial institution charges pre-closure fees. Also, know the rate of such a levy.
How to Apply for a Personal Loan?
Once you have chosen your lender, it is possible to apply for the advance as follows:
- Visit the official website (or app)
- To access the portal digitally (or via app), you will need to create your application.
- It should contain all the personal, financial, and employment information.
- Send the completed form with all required documents.
Though the documentation requirements have reduced drastically these days, it is still advisable to keep the following handy with you when applying for a personal loan – PAN card, Aadhaar card, ITR (Income Tax Returns) filed for the past 2-3years, passport-sized photographs, etc.
Before you apply for a personal loan, make sure to do some due diligence and have some idea about your EMI obligations. For this, you need to use simple online EMI calculators to figure out your Monthly Loan Repayment EMIs. These calculators allow you to adjust the tenure and interest rate to match your monthly income and see how much you can borrow and what EMI you will have to pay.
Here is a ready reckoner for you to get a broad idea about:
Suppose you want to take a personal loan of Rs 10 lakh for 5 years. Now, this is how your EMIs and total interest paid will differ based on the interest rates that you get for your loan:
- At a personal loan interest rate of 10%, your monthly EMI will be Rs 21,247 per month and you will pay Rs 2.75 lakh in total interest over the loan tenure.
- At a personal loan interest rate of 12%, your monthly EMI will be Rs 22,244 per month and you will pay Rs 3.35 lakh in total interest over the loan tenure.
- At a personal loan interest rate of 14%, your monthly EMI will be Rs 23,268 per month and you will pay Rs 3.96 lakh in total interest over the loan tenure.
- At a personal loan interest rate of 16%, your monthly EMI will be Rs 24,318 per month and you will pay Rs 4.59 lakh in total interest over the loan tenure.
- At a personal loan interest rate of 18%, your monthly EMI will be Rs 25,393 per month and you will pay Rs 5.23 lakh in total interest over the loan tenure.
- At a personal loan interest rate of 20%, your monthly EMI will be Rs 26,494 per month and you will pay Rs 5.90 lakh in total interest over the loan tenure.
As you can see, a loan of longer tenure will have lower EMI, but overall, you pay more as interest. So be careful about picking your loan tenure as well.
Note – If you have a credit card, then don’t think it is better to use it instead of taking a personal loan. Do read this detailed analysis of credit card vs personal loans. In fact, if you have a huge credit card outstanding that you are unable to pay, it makes more sense to just take a personal loan to clear credit card dues.
So that’s about how you should go about taking a personal loan smartly in 2023 in India.
Personal loan is a very good “tool” to use for better money management. But, unfortunately it does not give any tax benefits. I know a gentlemen who used to take small loans to buy niftybees and sell options to get rent from his investment. He builds a good fortune in this risky and must avoidable method.