Factors to Consider Before Taking a Loan: Complete Guide
Taking a loan is easier and faster than before. However, the speed of approval doesn’t reduce the responsibility of repayment. This guide walks you through the crucial factors you should know before taking a loan.
1.Purpose of the loan
The purpose of a loan is the reason you want to borrow money. It's always important to carefully consider your financial situation before taking out a loan, but sometimes a loan is the best way to finance a major purchase or project that you can't already afford.
Why people take loans?
🔹 Financing for a New Car
🔹 Emergency Expenses
🔹 Business Expansion
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2.Type of Loan
In general, loans are of two main types: secured and unsecured. Each type comes with its own features, repayment options, and tenures designed to ease your monthly commitments.
3.Interest Rate
Loans come with interest, so compare rates from different lenders. Choosing a lower interest rate helps reduce your total repayment and keeps EMIs affordable.
4.Credit Score (CIBIL Status)
Your credit score plays a key role in loan approval. Lenders check it before sanctioning loans, so ensure its error-free and improve it if needed to qualify for better limits
• Hard inquiries reduce your CIBIL score (usually 5-10 points for each inquiry)
• If you apply for loans from multiple places within a certain period of time, your CIBIL score can automatically be affected.
• A low credit score makes it difficult to get a loan or may cause you to get a loan at a higher interest rate.
5. Repayment period
Check the repayment period of the loan. Remember that the repayment period also regulates the total cost of the loan. Also, make sure that you make your monthly repayments on time, otherwise you will have to pay a penalty from your lender.
6. EMI Charges
EMI is the fixed monthly payment you make to repay a loan, which includes both principal and interest. Some lenders may also add additional costs like processing fees or late fees.
7. Delay Charges
Late fees are the penalty charges levied by the lender if you miss or delay your EMI payment. They increase the cost of your loan and can also affect your credit score.
8. Cheque Bounce Charges (CBC)
When you issue a cheque for loan EMI payment and it fails due to insufficient funds, mismatched signature or any technical reason, the bank considers the cheque to have bounced.
The penalty for cheque bounce charges varies from lender to lender. Late fees and GST are also added to the payment.
Constant cheque bounces affect your CIBIL score and impact your repayments.
9. Foreclosure charges
If you repay your entire loan before the agreed-upon term, the lender may charge foreclosure fees. These fees compensate the lender for the interest lost due to early repayment.
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10. Collateral Value
Collateral is an asset that is put up as collateral to ensure repayment to the borrower. The loan amount depends on the value of the collateral – for example, a home loan is limited to the current value of the home. Although some loans do not require collateral, they often incur higher interest rates.
11.Liquid Assets
Keep some savings or liquid assets on hand, so that even if there are setbacks, like a sudden job loss, you can pay off your debt until you recover.
12. Debt-to-income ratio
If you have any debt, your debt-to-income ratio is an essential consideration. This is your monthly debt as a percentage of your monthly income. The lower the ratio, the more likely it is that lenders will approve your loan and you will be able to repay it comfortably.
13. Financial condition
One of the most important things to consider before applying for a loan is your financial situation. Remember that you should take out a loan that you can repay without any financial difficulties.
Ask yourself, "Do I really need this loan? What are my options for getting a loan?"
If you don't need it, avoid taking out a large loan because it will result in higher fees and higher monthly payments. Take the loan when you are comfortably able to repay it.
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Under the right circumstances, taking out a loan might be a prudent financial move. You can make sure the loan helps you reach your goals rather than being a burden by looking at factors including your goal, ability to repay, interest rate, credit score, and financial stability. To reduce stress throughout the repayment process, schedule your EMIs in advance and always borrow wisely.
FAQ
What factors do you need to consider before taking out a loan?
How does interest rate impact loan affordability?
How does my credit score (CIBIL status) affect loan approval?
Should you opt for secured or unsecured loans?
How much EMI is affordable compared to your monthly income?
