Personal loans can come handy when your financial reserves are not enough to handle your personal needs. You may find advertisements of marriage loan providers, personal loan providers and home improvement loan providers floating in the newspapers and websites. But before you apply for personal loan, you need to take the following safety tips.
Borrow what you can pay
Before you apply for personal loan, you need to find your loan to income ratio. The ratio of your total EMIs to the net monthly income gives the loan to income ratio. It must be below 40% at all costs. Having EMIs not exceeding 10% of your monthly net income must be a thumb rule. The monthly outgo towards all loans must never exceed 50% of monthly income.
Short tenures are best
The tenure of your loan must be as short as possible and convenient. Having long tenures make it possible to have lower EMIs and that personal loan providers exploit to make the loans tempting. But the net outgo after the tenure turns out to be higher for the borrower. Personal loans are negative compounding and hence, the longer the tenure, the higher is the compound interest that the personal loan providers earn from you.
Personal loan EMIs must be paid back on time. Otherwise, you creditworthiness and CIBIL score take a blow and getting another loan may be very difficult. Exceeding the tenure will result in higher interest rates or penalties being slapped on you.
No borrowing for investments
Never borrow money from personal loan providers for investing in options that offer higher returns. Investment options are subject to market risks and if markets decline, then you will suffer losses and also fall in EMI trap. Take loans for building assets.
Say YES to insurance
If you are taking big ticket loans, then do opt for insurance cover. Your family will then not be saddled if something unfortunate strikes you. Your family will certainly lose some assets if loan repayment is not an option. Opt for term insurance plan of say INR 50,00,000/-
Be vigilant about rates
RBI often keeps changing the base rates, which do affect the way banks calibrate the lending rates. If you find a bank offering better rates than your personal loan provider, then think of transferring your loan. You may end up saving EMIs.
Documentation is important
Read each and every line of the loan document carefully. Personal loan providers, home improvement loan providers or even marriage loan providers may have terms and conditions which may cause you suffering if you don’t notice them before you apply for personal loan.
If you have many outstanding loans and are planning to apply for personal loan again, then find a personal loan provider which is offering cheaper loans. Consolidate all loans into one omnibus low-cost loan. A loan against property can also be used to repay all other loans before you take the next one.
Don’t mix retirement with loans
Never dip into the retirement corpus to fund your children’s education. Students can get scholarships or education loans. But no loan exists for retirement benefits. So, never sacrifice retirement corpus for loan repayment.
Take these tips in mind the next time you apply for personal loan. Your life will be far better than many others.