Emergencies are part of life. While we all think that emergencies will not hit us, but, life has its own way. Emergencies come unannounced and often when we are least prepared. Unlike the fortunate ones who have planned in advanced, people who don’t have emergency funds are left with no option than to opt for personal loans.
Few important aspects while taking personal loans
Choose your lender
We are bombarded with umpteen number of calls with offers for personal loans from banks, NBFCs and other micro-credit providers. While we may be in an emergency situation, it makes sense to not opt for the first offer we get. It is important to look around and evaluate other lenders and their term & conditions before finalizing one. The rates on personal loans have been falling lately and you might end up with a lower rate if you look around.
Understand your cash flow and EMI payments
While arranging the required funds might be the most important thing, it is equally important to be able to pay the EMIs every month. You should have a hard look at your monthly cash flows and ensure that you have enough free cash to pay the EMIs. If no, then you should look at ways to reduce your discretionary spends first. If it still doesn’t help, it is better to limit personal loans to a level where you can service the EMIs.
Processing Fee & other charges
Lenders have been known to fleece people looking for emergency funds. While you are desperate to arrange for funds, be sure to check the charges , getting down the processing fee of personal loans to below 1% or even to a flat fee when the loan amounts are higher works best. For example, if the banker is okay for 1% fee on a loan of ₹ 5 lakh, i.e., which is ₹ 5,000 as processing fee, there is no justification why he can’t limit the processing fee to that amount if your loan requirement increases to ₹ 10 lakh. The work required to process a loan amount would be same for ₹ 5 lakh and ₹ 10 lakh.
Foreclosure and Flexible Payment Options
Choose an option that does not penalize you for repaying the loan amount faster than the initial period. Banks and NBFC have high penal charges of as much as 4% if you want to prepay your loan. This can be very frustrating; while you took the loan to service the emergency, there should be no hindrance in you paying the entire amount back or make incremental payments whenever you have additional cash flows. Choose a hybrid repayment option, that allows you to get rid of your loans as soon as you can.
0% EMI Schemes are Traps
Consumerism and the current trend for instant gratification has pushed us towards Buy Now and Pay Later. And 0% EMI schemes are a perfect trap for people looking for this. Consumer and personal loans are available at a click of a button. People fall for this without looking at the processing fees and other charges. A ₹ 1,500 processing fee for your instant mobile phone worth ₹ 35,000 for a 6 months 0% EMI works out to a interest rate of more than 15% per year.
Protect your CIBIL scores
Your CIBIL score directly impacts the interest rate lenders are willing to lend you to. Higher scores get you lower rates. Every time you miss an EMI, it directly impacts your scores. Approaching too many lenders also impacts your CIBIL scores as your credit score is checked often. Too many checks might be seen as a credit hungry person and your credit score might get impacted. It is much easier to browse through loan aggregators online to check for lower rates and then approach a lender.
Don’t hesitate to get help of an expert understand the terms and conditions of your loan if you not good with numbers.