Personal loans are a quick way to get money for a short-duration financial need. You can use it for refinancing a large credit card bill, paying for a medical emergency or to pay for lumpy expenses like children’s school fees. While personal loans provide a convenient way to convert large expenses into easy EMIs, there are some important things to keep in mind.
Based on our experience of servicing and interacting with thousands of customers applying for personal loans at Credy, we have compiled these 6 practical tips to keep in mind when taking personal loans. It will help you save money, improve your credit score and satisfy your financial requirement without causing stress.
1. Know the Need
Personal loans are easy to manage when there is a specific expense that the money is used for. The expense can be for various needs – consolidating different loans & credit card dues, family occasions, medical emergency, lifestyle expenses like travel and so on.
Having a specific expense in mind has the following benefits:
- One-time nature: you know that the important family occasion won’t come again for some time or that the medical emergency was an exception. This allows you to pay back the EMIs with your monthly disposable income once the expense is taken care of.
- Knowing the loan terms: when you know the need, you know how much amount you need and for how long. If your credit card bill is Rs 40,000 and you want to convert that into EMIs via a personal loan, you know the loan amount should be Rs 40,000.
Customers who do not have a specific need in mind when taking a personal loan eventually end up
- Confusing loans with income – a personal loan is not a source of income. You have to pay it back, with interest. Taking a personal loan repeatedly because your monthly expenses are more than your monthly income is eventually going to lead to large interest expenses, delays and eventually a poor credit score.
2. Choose the Right Lender
There are many loan options – banks, NBFCs, online lenders, informal money lenders and so on. Not all are same, and not all would offer what your unique circumstances require. Identify your priorities – is it getting the money quickly? Is it having flexibility in loan terms and repayment options? Or is it saving interest cost? Here are some useful guidelines:
- Speed: If you need fast loans, you should pick lenders who have an online process. Online process doesn’t just mean having a website application. Check what their KYC process is, check how they take documents and signatures on documents etc. The speed that an online process gives, a paperwork-heavy and manual process will never be able to give.
- Interest Rates: You should evaluate for yourself if interest rates are a major concern for you. Small ticket personal loans are generally less sensitive to interest rates. For e.g. if two personal loan options have 3% difference in interest rates, total interest paid on a Rs 50,000 6 month loan would be different by less than Rs 500!
- Customer Support & Transparent Process,: This is probably the most important. A lot of lenders have hidden terms, undisclosed steps and third-party dependencies. The last thing you want in case of an urgent need is the lender telling you the process is stuck in some other department and no one can help. Rest all being the same, go with lenders who have an easy process and helpful customer support.
Based on your needs, you may prefer a lender who is fast and gives good service than a slower option with long opaque processes.
3. DON’T Overborrow
Customer support: But sir, why do you want just Rs 50,000? Your loan is approved for Rs 2,00,000
Me: Umm.. because I have to pay interest?
This actually happened when I got a call from a loan company after I checked out their website. Loan companies will always want to give you a loan higher than your need. For them its simple economics – their processing costs are almost the same whether the loan is Rs 50,000 or Rs 2,00,000. So why not give the customer higher amount and earn more?
As a customer, you have to make sure you borrow only the shortfall you have. Only the amount that you are lacking. This requires discipline, just as most financial best practices do.
Another way a lot of our applicants end up overborrowing is trying to pay off one loan with the other. DON’T do that. You will end up churning loans and enter a debt trap. Borrow what you need. Anything more is giving your hard-earned money for free to lenders. At Credy, when we reject such applications, we advise customers to avoid getting into a debt trap.
4. Ask For Detailed Loan Terms
Loan terms are not always very clearly communicated by the lender. You should ask for a one-pager of loan terms that covers things like
- Processing fees & interest rates
- Late fee structure
- Prepayment fee and eligibility
- Loan recall clause
- Cheque bounce charges
- Legal charges
You should calculate the amount of total late fees that you will have to pay if you are 1 month late. Make sure late fees and lender’s terms are reasonable and not like that of a “loan shark”.
5. Protect your Sensitive Data
A lender has access to a lot of your sensitive data. Make sure to ask them why they require that data and how securely is it stored. Here are some guidelines
- Use trusted websites: If you are going for an online loan, check the content on the website, contact information and details of the company management. Make sure that the website URL has https:// and a green address bar like this:
- Ask what your information is going to be used for: Not knowing how your data is going to be used can be risky for you. For e.g. sharing information like Aadhaar, PAN, credit card numbers etc. for no good reason is unadvisable. Some websites forward your leads to other companies without informing you. When those companies make a query on your credit score via your PAN, your score goes down. And you don’t know how many hits will happen!
- Protect your Aadhaar:
- When giving your Aadhaar details to a company check if they are licensed to verify your Aadhaar number. For e.g. Credy has implemented controls around Aadhaar data to be compliant with UIDAI and Govt. of India guidelines and is licensed with Khosla Labs to verify customers’ identity via Aadhaar.
- Never store your Aadhaar number on your mobile phone. Remember: Aadhaar Number + Mobile OTP = Your Signature So if you lose your phone, and it has your Aadhaar number on it, someone can pose as you and sign a document or do KYC as you.
6. Repay on Time & To The Right Party!
This sounds obvious but sometimes is hard to implement. If you are facing financial troubles and don’t have the money to pay the personal loan EMI, you can do two things
- Cut down any extra costs. Look closely at your expenses – there must be some expense that is avoidable at this point in time.
- Borrow from friends just for the EMI payment. Don’t go for an additional loan. Borrowing EMI amount from friends and paying ensures that your credit score is not affected. A bad credit score will ruin your chances of getting loans in future and cause considerable stress and cost in arranging finances from alternative sources.
Be careful to ensure you make repayments to the right party. Be extra careful when making cash payments. We had a customer who was paying his EMIs regularly in cash to a bank agent. Later he found out that the agent was not depositing the cash on time and using it for his own expenses! The customer’s credit history got permanently damaged because of that.
Make sure of the following when paying by cash:
- Check for some company identification of the collection agent
- Ask for a payment receipt/email to be sent after you make the payment. If the receipt is not received within 48 hrs, escalate the issue.
Take care of above to a get a good deal on your personal loan without affecting your long-term creditworthiness.
Let us know in comments if these tips were helpful!
Credy is a Bangalore based online platform that provides fast online loans for multiple requirements like credit card refinancing, education expenses, medical emergencies etc. We aim to be a trusted and responsible lender, and believe that educating the customers about best practices is important.