The easy availability of personal loans and the lack of savings habits among people today are two of the primary reasons why they take out debt to pay off credit card debt, meet sudden medical emergencies or make other payments. Do you plan to consolidate your credit card debt and pay it off with a personal loan? If yes, you have to read this before you take that call. Here are five essential facts you should be aware of before you take a loan to get rid of credit card debt or meet other expenses.
- Know your credit history
For personal loans, banks don’t require a lot of paperwork or collateral. They give you loans based on your creditworthiness. This is represented in a figure that is known as the credit score. Your credit score depends on your financial history. If you haven’t paid any bills on time in the past or defaulted on your payment sometime before, it can affect your score adversely.
Three credit bureaus (Equifax, Experian and TransUnion) are the ones that measure your score. You can get a free copy of your report every year from these bureaus so that you know if you are eligible for a personal loan and the interest charges that are applicable for you. A person with a low credit score will be charged a higher rate of interest for the same loan than a person with a good credit score.
- Know your affordability
Does
your financial situation allow you to take the loan in the first place? This is
the first question you need to ask yourself when you approach a bank for taking
out a debt. Yes, the monthly instalments may look affordable in the initial
stages. However, there is more to the loan than these instalments in the long
run. Compare loans to understand the
interest rates, APRs and tenures to choose the one that helps you save money on
interest payments.
- Know all the loan costs & terms
A personal loan is not just about the principal, interest rate and loan tenure. You have to be aware of the additional costs associated with the loan such as processing charges of the bank, the penalty for missed instalments, charges for pre-closing the loan before the actual tenure, flexible interest rates, if any and others. Read the loan contract in detail to know of these hidden costs, so that there aren’t any unpleasant surprises for you later.
- Temporary quick-fixes
You should always treat personal loans as temporary quick-fixes only because of many reasons. The interest rates on them are quite high, and they are accompanied by a lot of additional costs. Also, these loans can cost you a lot when you miss a few instalments. Therefore, you should have a proper financial plan in place to reduce your dependency on these loans. Having a contingency fund and adequate insurance policies in place are some ways to get a structure in your finances.
- Compare lenders
Banks aren’t the only lenders when it comes to taking out a debt during emergencies. You need to compare the loan policies and terms of other private financial institutions in your locality to understand what they have to offer. They could provide you with loans at lesser prices as well! So look for options, compare the terms and choose the one that suits you the best.
