Personal Loan Agreement: 7 key things you must know before signing | Mint

A personal loan may become a source of support at your time of need. On the other hand, ensure that you understand the terms and conditions surrounding the loan before committing yourself. Being informed helps you manage the process with confidence and make better decisions. Here are several things to note as you contemplate agreeing to a personal loan.

Understanding personal loans

An unsecured loan, often referred to as a personal loan, is borrowed for a given amount for various purposes, including debt consolidation, medical expenses, home improvements, and financing holidays. Since it’s an unsecured loan, you don’t need collateral, though this usually leads to higher interest rates. The interest rates for personal loans can range from 9.99% per annum to as high as 44% per annum. Carefully read the terms of the loan, the interest rate, and all the expenses that are involved before signing up for one.

Things to consider before taking a personal loan

1. Rates of interest: Among other aspects of a personal loan, interest rates set the total cost of borrowing. Consider spending some time evaluating different rates from multiple lenders and knowing whether the interest rate is fixed or variable in calculating repayments; each might work differently.

2. Loan amount and period: Make sure the loan amount and schedule of repayment suit your budget. A longer period increases the total sum of interest you would need to pay even though this increases cheaper monthly EMIs. By contrast, a short period means you face high EMIs but decrease total interest.

3. Conditions and terms: Read the loan terms and conditions carefully, noticing potential rate changes, prepayment facilities, default penalties, and payment schedules. If you cannot understand something, do not hesitate to ask your lender to clarify. You will save yourself from shocks later in case you understand the agreement in all its details.

4. Documents: Ensure that all your documentation is accurate and up-to-date, including proof of identification, address, income, and photos. Inaccurate documentation may lead to problems in the repayment process or delay approval. Before signing, ensure that the loan agreement has the right information.

5. Fees and charges: Keep an eye out for other costs related to the loan, such as processing fees, penalties for late payment, and prepayment penalties. You may do better by improving your planning and, above all, prevent any of these unforeseen costs that you had no idea applied when it happens.

6. Effect on your finances: Go through your present financial conditions to ensure the loan wouldn’t overextend your budget. Take a check if your monthly EMIs can be managed side by side with other spending liabilities of yours. With such overpriced lending, financial troubles and potential default might follow.

7. Credit score: High credit score, usually above 750, is necessary for loan facilities with favourable conditions. Pay all current bills by their due dates to ensure maintaining a high credit score. While considering your eligibility and interest rate, the lender focuses more on your creditworthiness.

In conclusion, even though a personal loan might be a very useful financial instrument, it is important to tread with caution. Read the fine print of the loan and consider offers from multiple lenders, and look at all costs, be it interest rates, application fees, or penalties attached to the loan. One can reduce risks and get himself a personal loan that may meet his financial goals by smart choices.

(Note: Raising a personal loan has its own risks)