Last Updated on Jan 17, 2022 by Manonmayi

Drawing a loan has never been easier than now. With the integration of technology, you can avail a loan in minutes for any purpose. 

But as a rational borrower, it is important to be prudent. Banks, financial institutions and many private lenders may provide you with various schemes, but it is on you to do your research. Listed below are the crucial factors you must keep in mind before applying for a loan. Let us read in detail. 

This article covers:

Ability to repay

Managing to avail of a loan may be simplified now. However, what is harder is to repay the debt. It is important that you assess your ability to make the repayment. This also includes figuring out the source of income that you can utilise for furnishing the instalment if any. Take into account your other liabilities and how they may stress your liquidity. Keep a check on your debt-to-income ratio and avoid applying for multiple loans.

Duration of loan

Your loan tenure is an important factor to be considered before applying for a loan. You may end up paying higher interest long term. Also, pushing your payments can stall your financial planning, disrupting other aspects of your finances. Loans availed on smaller time frames may demand higher EMIs at your end. Therefore, it becomes essential for you to be aware of your repayment ability in such a situation. 

In the short-term, the EMIs are high. But, to encourage faster payment, the lenders offer attractive interest rates. This eventually turns out to be in your favour. So if you have a steady flow of income and can afford the higher monthly instalment, choosing a shorter tenure can prove beneficial. You can also use online EMI calculators to get an estimated payment amount.

Research

There are many opportunities to obtain a loan in the market. These may seem lucrative on the surface, with low-interest rates and negligible costs. However, there are far too many Ponzi schemes floating in the market that require one to be prudent. The interest rates may also be based on a floating rate, which can increase with time.

It is, therefore, essential for you to conduct thorough research to avoid falling for unsuitable loan terms. With the internet being a ubiquitous and free resource, getting the required information is probably easy. One should always draw and accept loans only from trustworthy and reputed sources.

Interest rates

Interest rate is the crucial element that determines the final cost of your loan. In many cases, this rate is determined based on your creditworthiness and income level. Even the slightest difference in the rate can have an effect on the burden placed by the loan. 

There are plenty of financial institutions and banks that give you the option of taking out a loan. Being in a competitive environment, financiers are in a constant battle to provide the lowest interest rates. This makes the loan more attractive and fetches them customers. With the option to choose from various alternatives, you can select the one that provides the maximum benefit. Again, lower interest rates could be attractive, but hidden charges may dent your loan process. Also, confirm interest rates and whether they are fixed-rate or floating rate schemes beforehand to avoid hassle later.

Purpose of loan

The purpose for availing a loan should be very reasonable. Piling on loans for no valid reason could derail your finances completely. Also, an interesting and high reward investment may attract your attention. But one should never invest or trade with borrowed money, no matter how attractive the scheme or option looks. Should your endeavour fail, it could land you in a soup. Therefore, always have a Plan B before taking out a loan. Draw loans for well-defined purposes only.

Details on paperwork

Debt comes with a lot of cumbersome paperwork. It is imperative that you read and understand the fine print. Read all clauses carefully and understand the implication of all legal jargon. This ensures that you do not skip out on any hidden costs. It also puts out all information and keeps you wary of any issue that might crop up in the future. Knowing all the provisions and features is key for understanding whether all your financial needs are being met. Therefore assess all terms and conditions carefully.

Evaluate all costs

Interest and EMI payments are not the only costs involved with debt. It also includes processing fees and prepayment costs. To top this, some lenders may charge a hefty penalty for missing out on a monthly instalment. The interest rates may seem low, and EMI payments may feel manageable. But, there are many other costs to consider. 

Don’t overlook these charges, as they may even cancel out the attractive interest rates.

Credit score

The credit score is the indicator of your creditworthiness. The lending institutions study them before extending a loan. Having no records, undisciplined repayments, and multiple loans can acutely dampen your credit score. Having a disbalance of secured and unsecured loans can also have a negative impact. If you are availing a big loan, remember that defaulting on it could derail your credit score, effectively making you unfit for availing future loans. 

Updated documents

It is fair for the lender to check your background if they are trusting you with their money. It is also protocol to have all details of the debtor in case of non-compliance. Thus, having your original documents ready is necessary when taking a loan. These are verified and assessed before striking any deal. Keep your identity proof and address proof handy, as these are the most common documents you may require.

Conclusion

Getting a loan sanctioned involves a fair share of research, calculation, and self-assessment. Before obtaining a loan, reflect thoroughly on your repayment ability, current liabilities, your income, loan tenure, and, importantly, interest rates. Utilise your loan effectively to avoid extra costs, charges, and penalties on late payments. Always keep your credit score in mind before availing a loan.

We'd love to hear your thoughts 🥰