Personal loan precautions
Category: Personal Loan
How often have you been lured to avail a personal loan when your relationship banker has offered you a ‘no rules attached’ personal loan? Taking a personal loan may appear like an extremely convenient loan option since there may be minimal paper work and no sureties. Such loans are approved rather easily too since they are likely to be issued in limited amounts and for limited periods of time. Here are a few personal loan precautions that you must follow before applying for a personal loan.
Should be your least option
Taking a personal loan should be your extreme option. This is because after credit card loans, personal loans are the most expensive loans that are available in the market. Take a personal loan only if you feel that it will rescue you from more expensive debt – for instance, if you are struggling with credit card bills – or if you require it to build up an asset. You could even consider taking a personal loan if you want to fund your child’s education and your application for an education loan has been rejected. But don’t even consider taking a personal loan to spend it on a depreciating item.
Check your credit rating
If you plan to apply for a personal loan, it’s crucial that you check your credit rating first. Lenders are only required to offer their advertised ‘typical’ APRs to two-thirds of applicants. Therefore, if your credit rating is not in good shape, you may be offered a more expensive deal than the low rate loan you originally applied for.
As with any financial product, when it comes to taking out personal loan deals, it pays to shop around and compare APRs. The APR (annual percentage rate) tells the true cost of a loan taking into account the interest payable, any other charges, and when the payments fall due. Your bank may say it offers preferential rates to its current account customers but you might still find there are cheaper loans available elsewhere.
Know the risks of secured loans
Secured loans are cheaper than unsecured loans but you run the risk of losing your home if you don’t keep up repayments. Secured loans are only offered to homeowners with equity in their property and mean the lender effectively takes a charge on your property. So don’t sign-up unless you’re sure that you will be able to meet your repayments – this type of loan is basically less risky for lenders but more risky for borrowers.
Think about early repayment charges
It might seem unlikely at the time when you take out a personal loan – but don’t forget that it’s possible you will be able to pay off your debt early. Many loan providers will apply a charge if you wish to do so, so it’s a good idea to check how much this might cost before you apply for a particular deal. If you think there is a good chance you will want to settle your loan early, it may be worth searching for a deal that comes without any early repayment charges.