Points To Consider Before Applying For Personal Loan

Sound financial planning forms the foundation of good credit rating. Unless an individual has good credit rating he will be considered a high risk customer when it comes to personal loan. An individual can take a personal loan from a lender or a bank when in urgent need of money. There are various types of personal loans that one can opt for depending on the amount and repayment terms he or she is comfortable with. These are as follows - short term credit, long term credit, secured debt and unsecured debt. Each of the above mentioned loan type comes with an interest rate that varies from person to person and case to case.

A short term personal loan is ideally suited for purchasing an expensive home appliance or electronic item. Usually there is very low or no interest charged on this type of loan and the debtor is required to pay it off in a single payment within a specified period of time as mentioned in the loan contract. On the other hand, long term credit should be taken for making mortgage payment, buying a car or paying other installment loans that extend over a period of 5 years or more. There is a high interest rate charged on this loan, which is determined by several factors such as the amount of loan, the length of the loan and the credit rating of the debtor.

A secured loan offers collateral to the creditor. To elaborate further, the debtor pledges an asset of his in lieu of the loan that he is taking. Thus, in the event of failure of timely payment of the loan, the creditor can recover his amount by selling the collateral. Simply speaking, a secured loan comes with a guarantee of repayment so to say. Conversely, an unsecured loan is extended to the debtor solely on the basis of his credit worthiness. In case he fails to pay the loan on time, the creditor cannot recover his amount by any other means. Hence, such loans come with a high interest rate.

Before taking a personal loan, you should consider the Annual Percentage Rate (APR) charged by the creditor. This is the annual interest rate applicable on the loan amount and is computed on the basis of the risk involved in extending the loan to the debtor. You should also find out about the penalty charge if any applicable on your loan amount. This amount is charged by the lender if the borrower repays the loan amount prior to the expiry of the repayment time. Also make sure that your creditor offers you a Payment Protection Insurance that covers your loan repayment in the event of loss of job.

If you are worried about your ability to afford a personal loan, you can compute the same by calculating that your monthly installment does not exceed 5% of your monthly income. Apply for only as much loan amount as you need. Also, do your research on various lenders and banks so as to ensure that you get the best deal possible.