1. Get an estimate of how much you can borrow.
To start with, it's important to get a good estimate of how much money
you can borrow. Within the above ceiling, the loan amount in the range
of 2-3 times the annual household income of the borrower can be sanctioned.
Knowing your borrowing power saves you time. Use our
personal
loan calculator
to help determine monthly payments and what you
can afford as your loan.
2. Get a good estimate of your repayment capacity.
The loan amount granted to you also depends upon your repayment capacity.
The loan is repayable in the form of Equated Monthly Installments (EMI).
The EMI typically should not exceed 50% of your monthly household income.
You can also opt for clubbing your spouse's income along with your income
if you want to enhance the loan amount that is sanctioned to you.
3. Check out the interest rates being offered by different institutions.
The interest rates vary, depending on the tenure of the loan and the amount
of the loan. The interest rates offered by one institution can be more
than that of other institutions for a particular tenure, and can be less
for a different tenure.
A loan should fit your pocket and the term you wish to take it for. You
should get quotes of all the finance companies and map them according
to your requirements.
4. Check out the administrative and processing charges. Banks and
Non Banking Finance Companies (NBFCs) charge certain processing fees for
moving the case. Besides the processing fees, some institutions also charge
administrative fees for getting the legal appraisal and address verification
done. These charges are one-time charges collected by the institution.
5. Be cognizant of the other charges like prepayment
charges, etc.
Other charges like prepayment charges and commitment fees increase the effective cost. The prepayment charges are levied if you are prepaying the loan amount before the schedule, decided at the time of sanctioning the loan. It is levied because it disturbs the financial planning of the institution. So you can appreciate the fact that the interest costs are not the only costs, which the borrower has to bear. These charges go on to increase the real cost to the borrower above the stated rate of interest.
6. Compare loan schemes of different finance companies.
Compare loan schemes of different finance companies on parameters such as
interest rates, pre-payment clause, and upfront margin to be paid, Maximum
loan amount, eligibility, etc. Check -
- What the monthly loan payment is and what interest rate that translates into
- The duration of the loan
- Whether or not the scheme fit with your requirements
7. Zero in on the institution you want to take the funding from.
After weighing the pros and cons of all these factors, you can zero in
on the institution from which you want the loan from. You will be asked
to furnish personal documents to establish your age, employment details,
salary slip, copy of income tax returns, etc.
8. Read the Documents and ask questions.
Try to get a copy of the agreement or contract before you get into one.
Understanding the important clauses within the agreement can help you
avoid a lot of trouble in future. You can get all ambiguities resolved
by speaking to the staff of the bank or finance company, in whose favor
you shall be drawing the post-dated checks towards repayment of your personal
loan. In case you are uncomfortable with the terms, simply don't take
the loan from that lender.
- Check if there is a pre-payment penalty - if there is one, find out which has the lowest rate
- Find out whether the interest remains constant through the contract period
- Read the fine print carefully. Remember, if there is a problem later, what is written is what counts
- What the marketing person tells you verbally, carries no weight. Sign an agreement/contract that has been filled up by the financier. Signing blank agreements definitely does not work favorably for you.
10. Read between the lines.
The company will also ask you to sign some documents. You should try to
read between the lines and only after carefully understanding the legal
implications involved in all the agreements, should you put your signature.
Always ask questions in case you need any clarification, especially in
matters regarding the legal recourse the company has against you, in case
you default on the repayment of even a single installment or in case the
check issued by you bounces.
11. Get your documentation in order.
No matter who lends you the money, you need to have some basic documents
ready -
- Proof of Income
- Proof of Residence
- Banking History
- Proof of Identity
- Signature verification from the bank
- Post-Dated-Checks or Employers' Authority for salary check-off facility
- Photographs
12. Fulfill all the formalities.
After you have fulfilled all the formalities to the satisfaction of the
company, the company will send the documents along with post-dated checks
to their processing centre. It is good to have PDC's ready on intimation
from the bank about approval of the loan. Some banks take 2 to 3 weeks
to use PDCs. If the PDCs are ready loan disbursement will be quicker.
13. Pay the installments on time.
Once the loan has been sanctioned to you, make sure you pay the installments
on time. This will help you to maintain a good credit relationship with
the lender. It will not increase your overall loan cost, rather you will
be benefited by a lower cost loan in future. Ask for the interest computation
sheet or the loan statement at the end of the year. Verify the interest
rate charged.
There is no law or regulation that requires lenders to use a standard
format to disclose all their interest charges and fees. That gives lenders
the opportunity to play around with the way they sell you the loan! The
loan could turn out to be very expensive if you added up the processing
charges and the dates on which you have to pay back your installments.
Some lenders may not give you anything in writing. Talk to a few friends and relatives who may have taken a similar loan from the same lender and see what their experience has been.