06 NOVEMBER, 2019

Life can throw a curveball at you sometimes. At such difficult junctures, a personal loan can come in handy. Yet, despite a dire financial need, you must be cautious before taking a personal loan.

What exactly are personal loans?
Unlike car or home loans, that require a collateral, personal loans are unsecured loans. This means that the bank is taking a higher risk when they give personal loans. To offset this risk, they provide the loans at much higher interest rates.
Keep these ten factors in mind if you are thinking about taking a personal loan:

  • Take a critical look at your overall finances
    Personal loans may seem like the best solution for your emergency cash needs, but they have short repayment tenures and high-interest rates. This means a higher monthly EMI. So, consider all your other payments and requirements before availing a personal loan. 

  • Don’t avail more than you need
    Since personal loans are easy to avail, there’s a tendency to take more than your current requirement. This is a mistake for which you will literally have to pay heavily, and so you must limit the amount to what you need.

  • Look for cheaper alternatives
    Try to choose other cheaper options like loans against deposits shares or gold. These loans are secured and have lower interest rates when compared to personal loan rates.

  • Resort to Personal Loans only when the Situation is Dire
    With peer pressure and societal demands, you may be tempted to take bank loans for buying the latest Smartphone or for travel. Doing so will affect your financial goals. So, stay away from personal loans until the situation is dire.

  • Seek the best interest rates
    Banks are always looking to woo credit-worthy borrowers. So, sharpen your negotiation skills and you could end up with an interest rate lower than the norm. Even if it's just a slight reduction, it could help to lighten your overall financial burden.

  • Scrutinise the details carefully
    Make sure you read the loan document thoroughly before signing. Look for the fine print. This will help you stay on guard. Don't just blindly trust the details provided by the banking personnel, as they may not be aware of all the details.

  • Understand the Deferment Procedure
    There's always a possibility that your financial situation may take a turn for the worse in the future. A medical emergency or loss of job may lead to an inability to pay back the loan. So, it pays to be aware of what happens when you can't repay the loan.

  • Know the Consequences
    Defaulting on your loan leads to serious consequences. Being conscious of the consequences can make you a disciplined borrower and help you pay your loan on time.

  • Defaults affect your Credit History
    Besides an impending legal struggle, loan defaults take a toll on your credit history too. Even if you manage to pay the loan later on, it reflects poorly on your credit history. A good credit score is essential to negotiate loan rates later on.
    The most important mantra to remember is that a personal loan should only be taken when in absolute need.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.