Taking out a debt? Five facts to know before you do so
The
easy availability of personal loans and the lack of savings habits among people
today are two of the primary reasons why they take out debt to pay off credit card debt, meet sudden medical emergencies or make other
payments. Do you plan to consolidate your credit card debt and pay it off with
a personal loan? If yes, you have to read this before you take that call. Here
are five essential facts you should be aware of before you take a loan to get
rid of credit card debt or meet other expenses.
- Know your credit history
For
personal loans, banks don’t require a lot of paperwork or collateral. They give
you loans based on your creditworthiness. This is represented in a figure that
is known as the credit score. Your credit score depends on your financial
history. If you haven’t paid any bills on time in the past or defaulted on your
payment sometime before, it can affect your score adversely.
Three
credit bureaus (Equifax, Experian and TransUnion) are the ones that measure
your score. You can get a free copy of your report every year from these
bureaus so that you know if you are eligible for a personal loan and the
interest charges that are applicable for you. A person with a low credit score
will be charged a higher rate of interest for the same loan than a person with
a good credit score.
- Know your affordability
Does
your financial situation allow you to take the loan in the first place? This is
the first question you need to ask yourself when you approach a bank for taking
out a debt. Yes, the monthly instalments may look affordable in the initial
stages. However, there is more to the loan than these instalments in the long
run. Compare loans to understand the
interest rates, APRs and tenures to choose the one that helps you save money on
interest payments.
- Know all the loan costs & terms
A
personal loan is not just about the principal, interest rate and loan tenure.
You have to be aware of the additional costs associated with the loan such as
processing charges of the bank, the penalty for missed instalments, charges for
pre-closing the loan before the actual tenure, flexible interest rates, if any
and others. Read the loan contract in detail to know of these hidden costs, so
that there aren’t any unpleasant surprises for you later.
- Temporary quick-fixes
You
should always treat personal loans as temporary quick-fixes only because of
many reasons. The interest rates on them are quite high, and they are
accompanied by a lot of additional costs. Also, these loans can cost you a lot
when you miss a few instalments. Therefore, you should have a proper financial
plan in place to reduce your dependency on these loans. Having a contingency
fund and adequate insurance policies in place are some ways to get a structure
in your finances.
- Compare lenders
Banks
aren’t the only lenders when it comes to taking out a debt during emergencies.
You need to compare the loan policies and terms of other private financial
institutions in your locality to understand what they have to offer. They could
provide you with loans at lesser prices as well! So look for options, compare
the terms and choose the one that suits you the best.
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