The Ultimate Cheat Sheet on Personal Loans
If you have an interest in fashion or retail, you would have definitely come across one size fits all clothing items. That one clothing item that fits every person, regardless of their body type. Quite like that pair of jeans from The Sisterhood of the Traveling Pants.
What does any of this have to do with loans?
Well, while most people will tell you that there never is a one size fits all solution to matters of money, the truth is that the best financial advice (even when it comes to borrowing money), quite like those magical jeans, fits everyone. You could even call it a rule of thumb.
So, if you are looking for a personal loan or already have one, here’s the only cheat sheet you will need to keep in handy!
Common Terms to Keep in Mind
1. Fixed rate of interest: A fixed rate of interest basically means that the interest rate on your loan doesn’t change for the loan tenure.
2. Variable rate of interest: Unlike fixed rates, variable interest rates tend to change over the tenure of your loan. The amount you end up paying as interest on your outstanding balance changes as market interest rates change.
Which bring us to the next term.
3. Market interest rate: This interest rate is the prevailing interest rate on loans. It is determined by factors such as the demand and consequent supply of credit in the market, the duration of loans, and if the loan is secured or unsecured.
4. Nominal rate of interest: Also known as the advertised rate of interest, this is the interest rate that is used to calculate the interest payment on your loan. So, if you decide to borrow $10,000 for 5 years at 6% p.a., this 6% is your advertised interest rate.
5. Effective rate of interest: Known by many names, the effective rate of interest (EIR) or average percentage rate is the true economic cost of your loan. It includes fees such as processing fees, legal fees, and any other fee that the bank may charge you. Always keep in mind that while comparing personal loans from different banks, one of the decision-making parameters should be the EIR and not the advertised rate of interest.
The Different Types of Personal Loans Available
1. Secured personal loan: Secured personal loans are also called collateral loans for the simple reason that in order to be eligible for the loan you provide security to the bank. This security can be in the form of your car, your home, or investments. Usually, personal loans are unsecured, but you can get a secured personal loan if your credit history isn’t the strongest out there.
2. Unsecured personal loan: Most personal loans are unsecured loans. The amount you are allowed to borrow is based on your financial history alone. So, a good credit score goes a long way in ensuring that you are eligible for a personal loan.
3. Term loan: As the name suggests, term loans are personal loans that are repaid in fixed instalmentsover a fixed period of time. These loans can be secured or unsecured.
4. Balance transfer: This type of personal loan involves transferring your current outstanding loan amount to another bank whose terms are considerably more favourable.
5. Personal line of credit: This is an unsecured revolving loan account. With a line of credit, you borrow how much you need and pay interest only on the amount that you have borrowed.
What You Need to Consider
1. Reasons for the loan: There are many reasons behind taking a personal loan. You could be taking a loan to help pay off credit card debts or to fund your wedding. Whatever the reason, always check if there are alternative means of finance. Moreover, if you are taking a personal loan to fund a vacation that can wait, then maybe you should consider waiting for a while and save up so that you won’t have to borrow a large amount.
2. How much you want to borrow: You may think that this is self-explanatory and really isn’t worth mentioning. But this is actually extremely important and closely tied to the previous point.While you may not be able to determine the exact amount to borrow, it’s good to have a vague idea of how much you need. This way you can use a personal loan calculator and figure out how much you have to pay each month in order to clear your loan.
And this brings us to another important consideration – paying your loan.
3. How you intend to repay your loan: You know that famous quote from Jurassic Park? The one where Jeff Goldblum’s Dr Ian Malcom says, “Your scientists were so preoccupied with whether they could that they didn’t stop to think if they should.”That’s the same with personal loans.
Just because you are eligible for a personal loan doesn’t mean that you should get one. Especially without considering how you are going to pay it back. If you can’t afford to make the monthly instalments on time, then defaulting on your loan will only harm your credit score.So, before you apply, take a look at your finances. If you think you may end up struggling to make the payments, then the loan may not be worth it.
4. The documents you need: Once you have shortlisted a personal loan that you intend to apply for, take a look at the documents that you need to provide and keep them ready. This will just accelerate the application process.
Most banks will require you to submit in person or online, income-related and identity-related documents before they approve your application.
Questions You Should Ask
No matter how much research you do, you will have questions regarding the personal loan you are about to apply for. The only way to have all your doubts cleared is to ask questions.
Here’s an extensive (but by no means exhaustive)
list of questions you should ask ( in no particular order of priority):
1. How long will it take for my application to be approved?
2. I am not eligible for a personal loan but have an excellent credit score. Can I get a personal loan on those grounds?
3. Why has my application been rejected?
4. What can I do if I my application for a personal loan is rejected?
5. How does each application affect my credit score?
6. The amount I need is more than what I am eligible for. Will a guarantor help me get this higher amount?
7. Is there an early repayment fee? If so, how much is it?
8. How much is the processing fee?
9. Apart from a personal loan, what are the other options I have?
So, if you are looking to apply for a personal loan, make sure that you refer to this cheat sheet. It could go a long way in helping you make the right decision. Not just in terms of the type of personal loan you want, but also in terms of what you should consider before applying for one.
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