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    Points to consider before availing a Personal Loan

    Personal loans are a great financial tool that has a wide range of uses. The popularity of personal loans has reached a peak where almost every other promotional mail from a bank is regarding a pre-approved personal loan. Whether it is in your mailbox or your inbox, offers on personal loans are plenty.

    But before taking up a personal loan, there are a few things to consider. And we’re not just looking at the terms and conditions of a loan, whether you’re getting the best rates from the best lenders but will be going into a little more detail and even examining the purpose of the loan and evaluating viable alternatives. Below are points to consider before availing a loan.

    What do you need the loan for:

    While many opt for a loan to meet a certain requirement, there are quite a few individuals who end up overshooting their requirements and opt for a loan amount much amount which is higher than needed. They get excited and carried away with the aspect of coming into extra funds. Depending on an individual, these funds could be used for more noble ventures such as investing in high interest savings accounts or on more frivolous and trivial avenues such as an impulsive shopping spree.

    Prioritizing the need for the loan is absolutely imperative. Is it to fix a broken car? Is it to buy new furniture? Can you go divert some of your funds from your next salary or dip into your savings to satisfy the need? When you prioritize your need and weigh it against all options available and the only answer left is to opt for a personal loan, then go in for it. The last thing anyone should do is go in debt when they have the chance to avoid it.

    There are certain instances when a personal loan will come in handy and then there are instances where they won’t. The reason we have specialised loans is because they can provide you the best benefits for a particular nature of expense. If you’re purchasing a car or re-doing the house, a personal loan wouldn’t be the best option.

    Can you afford it:

    So taking a loan is the only option left? But a loan is a viable option only when the individual has the means to repay it. One of the critical factors for having a loan application approved is the individual’s salary. The borrower must earn a certain annual salary to qualify for the loan amount he/she desires.

    The general rule of thumb is that a borrower can borrow a maximum amount of up to 8 times his or her monthly salary. Now the chances of getting a loan amount that exceeds this limit is slim but even coming close to this limit will dictate how easy or difficult it would be to pay back a loan amount.

    Interest rates can seriously determine how much one can borrow. The interest rates on a personal loan go a long way in determining what makes a loan affordable and what doesn’t. The loan comes with additional charges as well which determines its affordability. Processing fees, late payment fees and other administrative fees can add to the overall cost of the loan. Some loans boast really low interest rates only to add in a hefty processing fee which can eat into the loan amount.

    Processing fees can go as high as 3% of the loan amount. Other fees to keep an eye out for is an early payment fee or fee for change in tenure.

    Hence, when comparing various personal loans, don’t just look at interest rates. The other fee and charges of the loan can either make it or break it as an option. Getting the best rates possible on a loan makes it that much easier to service. Try and use online calculators that can give an estimate on how much the instalment would work up to monthly.

    Secured or unsecured loan:

    Personal loans offered in Singapore can fall under two broad categories which are secured and unsecured personal loans. Secured personal loans require the borrower to put down a personal possession as a form of collateral. This could be a property title or the title to a car. The possessions should be owned by the borrower and this form of loan usually allows the borrower to get higher loan amounts.

    Majority of the personal loans however are unsecured in nature. This means banks will give out the loan based solely on the credit rating of the borrower. Unsecured loans do not require a borrower to put up any collateral but comes with the downside of having a higher rate of interest than the secured loans.

    Flexibility:

    A personal loan is meant to be flexible in terms of the nature of its use. But when availing a personal loan, one should take care to ensure the terms of the loan comes with a certain degree of flexibility as well.

    Getting a personal loan is just the tip of the iceberg. Paying it back is when these additional features really start to add up. Every borrower should look to pay off their loans in the shortest timeframe possible. But life is not as certain as the loan instalments a borrower has to pay each month. There might be cases when there is a fluctuation of income or emergency situations and other expenses crop up which doesn’t leave the borrower with enough to make the loan instalment.

    During such times it becomes imperative that the loan has flexible features. These may come in the form of being able to make advance payments to lower the rate of interest and subsequently bring down the instalment amount, extend the tenure of the loan and in some cases even increase the loan amount borrowed.

    Credit Rating:

    Definitely the most defining criteria for the successful approval of the loan is the borrower’s credit rating. A borrower must ensure his/her credit rating is in a good condition.

    Most banks advertise extremely fast approval and processing times with some even touting a span of 24 hours but all this is advertised under the assumption that the credit rating is in top order.

    Unfortunately, not everyone can boast of great credit ratings. Some might have a few late credit card payments to their name weighing down their credit scores while others might not even have a score which is just as bad as it doesn’t give the bank any history to judge how responsible a borrower will be with repaying the loan.

    Minimum Tenure:

    The tenure of a loan is something to pay attention to as well. While most loans offer tenures that start off with 12 months, it's important to settle on the right tenure. Too long a tenure will reduce the instalment amount that needs to be paid but will result in a heavier amount being paid as interest over the course of the tenure. Shorter tenures mean less interest but result in higher instalment amounts. A tenure should be chosen such that it allows the borrower to pay the instalment with ease as well as ensure that the loan is paid off in the shortest time possible.

    Personal loans are a great way to ease financial needs provided they are utilised efficiently. Taking the above points into consideration will allow borrowers to find the right loan for their needs.

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