What Should First-Time Personal Loan Borrowers Know?

Personal Loans

An online personal loan is easy to avail of due to its online, simple, and quick application process.  Many banks and NBFCs provide hassle-free loans with instant approval after document verification. It has significantly reduced the stress and effort of borrowers. However, it would help if you still were careful when applying for a loan online. If you’re a first-time personal loan borrower, there is a bunch of information that you should know to have you better prepared for a positive loan application outcome.

Below are the eight things that you should know before applying for a first-time personal loan:

Choosing the right lender/ lending institution

Some online platforms and applications allow one to apply for a personal loan.

The most important thing to do to avail of an online personal loan is research the available lenders. 

Different lenders offer different features with their personal loans. For example, they might differ on their:

  • Terms and conditions
  • Rate of Interest
  • Eligibility Criteria 

Therefore, you must research properly before finalizing the lender. You can also compare the different personal loans available from different lenders and select the closest one to your needs.

Collecting the required documents

After you’ve narrowed down the lender, the next thing is to get all the required documents in one place. It helps in a quick and smooth application process. Moreover, it reduces your chances of loan rejection due to the insufficiency of documents.

Online personal loans might require one to upload the necessary documents. A few standard documents asked during the application process are-

  • Proof of identity
  • Proof of age
  • Proof of address
  • Proof of salary (in the case of salaried employees)
  • Proof of income (in case of self-employed applicants)

Researching the loan interest rate

One must carefully evaluate the interest rate offered by the lender before applying for a loan. There are two kinds of interest rates:

  • Fixed rates of interest
  • Floating rates of interest

The interest rate can depend on several factors; some of them are:

Checking the hidden charges and fees

Several banks and NBFCs levy extra fees and hidden charges on the personal loan application. Few such charges are-

  • Processing fees
  • Charges for foreclosure

Before signing the loan documents, knowing about all such fees and charges is advised to avoid a surprise later.

Checking credit score

Credit score decides the creditworthiness of the borrower. Therefore, it plays a crucial role in the personal loan eligibility checklist. 

If the borrower has a good credit score and credit history, the chances of his loan being approved are higher at a lower interest rate. One can quickly check their credit score free on various online platforms. A credit score of 700 or above has the chance of being eligible for pre-qualified personal loans.

Considering present liabilities

Personal loan borrowers, especially first-time loan borrowers, also need to consider the present financial liabilities before filling out a new personal loan application. Such financial obligations can lower your chances of having a personal loan approval as it affects your repayment capacity in the lender’s eyes.

  • Credit cards
  • Loans like – house loans, car loans, etc.

Assessing the debt-to-income ratio will help in financial planning regarding personal loans. In addition, it will further assist in dividing the income for clearing the credit and other purposes. To calculate the ratio of debt to income, one can follow the steps given below:

  • Calculate the EMIs and monthly income
  • Divide the EMIs/credit by the monthly income
  • The resulting number would be the debt-to-income ratio

A ratio of thirty percent or below is often considered to be appropriate.

Having a Solid Plan for Loan Repayment

Having a plan regarding the loan repayment will help divide the income correctly. This plan will also assist in clearing the loan in the planned period. Some banks and NBFCs offer financial tools like a personal loan EMI calculator to preempt your EMI. One has to enter the loan amount and tenure, and the calculator will calculate the EMI. It should be done before filling out the loan application as it helps in making a sound loan repayment plan.

Checking foreclosure terms & charges

Most online loans also come with the option of foreclosure, which means one can repay their loan before the loan tenure. However, some lenders levy foreclosure fees. It is advised that the borrower understands the foreclosure rules and their fees.

An online personal loan comes with many benefits. Understanding what such loans entail helps in making informed decisions. The key here is first to analyze what kind of personal loan is needed and then add in the rest of the factors to make it more suitable for individual needs.

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Nirupama Verma is a self passionate blogger, managing a bunch of informational blogs. She has written a lot of informational content for several popular blogs.

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