The popularity and demand for personal loans have increased exponentially over the last few years. Although NBFCs have made the application and approval procedures straightforward for borrowers, first-time loan applicants often find it confusing to proceed. So, here are the five most important things a first-time borrower must know before applying for a personal loan.
1. Borrowing the Right Loan Amount
Many NBFCs provide generous loan amounts that they decide according to the applicant’s income, credit rating, DTI ratio, and other factors. However, being eligible for a higher loan does not mean the applicant should take all. Over-borrowing will stress the finances by increasing the interest outgo and making the EMIs bulkier. Therefore, evaluating the expenses and calculating the costs before borrowing is crucial.
2. Selecting the Right Repayment Tenure Reduces the Loan Burden
Most NBFCs are flexible with their repayment tenures. They allow borrowers to select their repayment tenure according to the EMI amount they can afford each month. The applicant may use a personal loan EMI calculator to calculate the EMI amount for different loan terms. Accordingly, they can finalise the loan term with EMIs adjustable to their monthly budget.
Those who can afford a bigger EMI each month can select a shorter term. It will help them repay the loan faster and save money on the interest outgo. However, those with a limited monthly budget may opt for a longer loan tenure with smaller EMIs.
3. A Good Credit Score is Necessary
Many first-time applicants think they stand in a better position because they have never taken a loan before. However, that is not the case. Most lenders ask for a credit score of 725 or above to approve loan applications.
The credit score an individual builds over time indicates their creditworthiness. Those with no credit history will often find it challenging to apply for a loan. Although some lenders provide loans to individuals with bad or no credit, they usually charge higher personal loan interest rates than usual.
4. Applying for Multiple Loans is Not the Right Way
Many first-time applicants make the mistake of applying for multiple loans simultaneously. They hope to get approvals from some of them so that they can compare and finalise the most suitable one. However, they don’t know that applying for multiple loans at a time attracts several hard enquiries on their credit report, which harms their credit score. Too many applications also project them as credit-hungry borrowers, which reduces their chance of getting loan approval. Therefore, comparing lenders and applying for the best one is the right approach.
5. Interest Rate is Not the Only Parameter to Compare Lenders
Comparing lenders before applying for a personal loan is essential to making an informed decision. But most applicants are concerned about the interest rates only. They aim to compare different lenders’ interest rates and grab the deal with the lowest number. However, that is not the right approach to comparing lenders. There are several other parameters to check, including repayment terms, loan amount, customer service, processing fees, documentation requirements, etc. One may finalise the best lender only after looking at all these factors.
Those looking for a personal loan for the first time must know and keep these things in mind. These improve their chances of approval and streamline the loan process they find perplexing.
