Things to know for first-time personal loan borrowers

A personal loan is the perfect financial solution for someone in urgent need of funds but does not have assets to put up as collateral. It is a no-questions-asked collateral-free loan that can be used for any legal purpose. This makes it ideal for the younger generation who have just started earning and building their assets. Personal loans are usually for a short tenure of up to five years and charge a higher interest rate compared to secured loans. However, when it comes to an emergency, you can’t beat a personal loan for the ease, speed and convenience it offers.

Advantages of taking a personal loan include-

No collateral - The convenience of getting a collateral-free loan is unmatched. This feature is what makes personal loans so popular among the younger generation.

Ease of use - The user interface is very friendly and convenient. It makes it very easy for first time borrowers to navigate and place an application.

Quick disbursement- The beauty of personal loans is their speed of disbursement. On some instant personal loan apps, you can get your cash within 15 minutes of applying for the loan.

Minimal paperwork - There is virtually minimal paperwork since a few documents just need to be uploaded. The absence of paperwork ensures that the online app has more takers since nobody likes the cumbersome offline procedure.

Cheaper than a credit card- A personal loan charges lower interest rates compared to credit cards. This makes personal loans more attractive for big-ticket purchases.

If you are on the verge of applying for your first personal loan you will do well to remember the following pointers before signing on the dotted line.

• Check your credit score online
• Compare multiple lenders and settle for the right one
• Keep the basic documents ready
• Use the personal loan EMI calculator
• Check for hidden charges
• Understand the rules related to prepayment
• Consider the Debt to Income ratio
• Have a repayment plan ready
• Do not apply to multiple lenders

Check your credit score online

It is important for you to check your credit score online before you apply for a personal loan because that is the first piece of information that a lender looks for. You must have a credit history of at least 6 months before the credit report can be generated along with the credit score. Check the credit report carefully and rectify any errors if you find them. If your CIBIL score is over 750, you can rest assured that your loan application will go through comfortably.

Compare multiple lenders and settle for the right one

Never settle for the first lender. Even if the offer is good, look around and compare other lenders before the final decision is made. There are promotional offers available around the year and you would do well to do some internet research and figure out if any are available. You might end up saving a decent amount.

Keep the basic documents ready

The online process doesn’t need any paperwork but the basic documents will need to be uploaded. So, it is best to keep them ready before filling in the online application. You will need to upload the following -

1. PAN Card
2. Aadhaar Card/ Driving Licence/Passport for address verification
3. Salary slips of last three months
4. Bank statements of salary account of the last six months
5. Self-employed individuals will need to submit Profit and Loss Statements and ITR returns.
6. It is best to keep them handy so that you can process your loan application faster.

Use the Personal Loan EMI calculator

While the amount of loan depends on your need and eligibility, the interest rate is determined by the lender. Only the tenure is a variable in your hands. You can calculate with various tenures to figure out the ideal EMI that is convenient for you. This will help you to identify the ideal loan amount and tenure for you.

Check for hidden charges

Always read the fine print carefully and understand the charges involved. Every charge would add to the total cost of the loan. It helps to know all the details in advance so that you do not have any nasty surprises later.

Understand the rules related to prepayment

Most lenders allow prepayment of loans after six months without any prepayment penalty. If you foreclose the loan before six months, minimal charges will be applicable which may vary from lender to lender. So, it is best to know the details before entering into an agreement.

Consider the Debt to Income Ratio

It is a golden rule to never let your debt income ratio exceed 40%. This will ensure that your financial obligations are in control and you do not have to struggle to pay your EMIs. You will need to remember this from the first personal loan you take and practise financial discipline to ensure that this line is never crossed.

Have a repayment plan ready

Before you enter into a personal loan agreement, you have to keep your repayment plan ready. You should know how you plan to pay the EMI and fit it into your monthly budget. Once you have a plan in place, you should ensure that you never miss out on a payment. This will help you to maintain a good CIBIL score. You can choose to set up an auto-debit facility so that there is no delay.

Do not apply to multiple lenders

It is never a good idea to apply to multiple lenders at the same time. It will actually diminish your credit score because you will seem desperate for a loan. Compare the lenders and narrow down on one who seems perfect for you.

It is good to set up a few rules for personal finance management before availing of the first personal loan. It will help you to manage your EMIs and control your monthly budget. A personal loan is a convenient option to handle short term funding emergencies when you need to buy a gadget, renovate your home, go on a vacation, get married or even get a hair transplant. When you use your funding options wisely, you can ensure that your credit score is not damaged in any way. Being aware of the consequences before entering into an agreement is an exercise of financial prudence and is bound to be rewarding in the long run.