A personal loan serves an array of purposes – be it renovating your house, meeting medical expenses or funding your academic degree, a personal loan is one of the more versatile financing options available in the market.
Here is a quick guide to some of the more common terms that you should have an idea about, before you apply for a personal loan:
When you apply for this kind of a loan, the repayment would consist of both the principal and interest components. Interest is essentially the amount that your lender would charge, for letting you take out the loan and use it according to your obligations.
Most banks and financial institutions have a pre-determined eligibility criteria that you’d have to meet in order to successfully take out a personal loan. Eligibility criteria entail some of the parameters that go on to determine whether you have the ability to repay the debt on time.
Some of the more important criterions include your employment status, a steady source of income (whether you are a salaried professional or self-employed) and credit history.
● Processing charges
Generally, a maximum of 1-2 percent of the total loan amount is levied as processing fees. Since these charges compound the total cost of the debt, a lower processing fee is always helpful.
● Charges for late-payment
Once you have taken out a personal loan, the next step is to set aside adequate funds to meet your EMI obligations. In case you don’t end up paying the EMIs on time, most financial institutions would levy a penalty, essentially known as late payment fees. If you are struggling with a steady cash flow, make sure to factor in such ancillary costs as well.
● Pre-closure charges
Pre-closure of a loan refers to when you pay off the debt, in full, well before the loan tenor has expired. Generally, lenders levy 2-5 percent of the total loan amount as pre-closure charges.
● Loan approval procedure
It is the loan sanctioning officer’s discretion to sanction the loan amount, basis the eligibility criteria set by the lender. The whole process usually ranges from 48 hours to a maximum of 2 weeks. Once all relevant documents are validated, the loan disbursal process takes about a week.
● Credit score
Your credit score is always the first pre-requisite in order to successfully avail a personal loan. Generally, a credit score in upwards of 700 is considered to be a good bet while taking out a personal loan.
● Debt consolidation
Planning a repayment schedule can become difficult, particularly when you have a number of debts to pay off. This is where debt consolidation becomes so important. Having consolidated your debts, you’d need to focus your attention on just one loan and correspondingly, one repayment date.