We all know that taking a loan is a big decision, because even though it solves your financial need for the time, you get yourself an added monthly expense for years. From buying a house, funding your child’s education, or just needing extra money for personal reasons, a loan can help you achieve your goals. But before you sign the papers, while the bank personnel treat you like a king/queen, it’s important to know what you’re getting into.
Many people borrow loans without understanding the terms and later find themselves in big financial trouble. So, in order to avoid such problems, here are seven simple, but important things you should check before taking any loan.
Menu list
1. Ask Yourself, Why Do You Need the Loan?
Start by asking yourself: Do I really need this loan right now? If it’s for something urgent like medical bills, a loan might be necessary. But if it’s for something avoidable, like getting a new phone or planning an expensive holiday, it’s better to skip it. Because a loan is a responsibility. You’ll be paying it back with interest. So, make sure your reason is solid and unavoidable.
2. Go Through Your Monthly Budget
Before taking a loan, you must look at your monthly income and expenses. Precisely calculate how much you can comfortably pay every month as EMI without disturbing your regular lifestyle.
For example, if you earn ₹40,000 a month and your fixed expenses (like rent, groceries, etc.) are ₹25,000, don’t go for a loan that requires ₹15,000 in EMI. You’ll be left with nothing for emergencies or savings.
3. Interest Rate
This is one of the most important things to check & to know before taking any type of loan. The interest rate decides how much extra you’ll pay over your loan amount.
Let’s say you borrow ₹2 lakhs for 2 years. At a 10% interest rate, you’ll pay around ₹21,000 extra. But at 14%, you’ll pay more than ₹30,000.
So even a small difference in interest rate matters. Always compare rates from at least 3-4 lenders. Some banks may offer lower rates if you have a good history or a stable job. Don’t just go for the first offer you get.
4. Credit Score Check
All banks or lenders will always do a credit score check on your profile to see how reliable you are as a borrower before they approve your loan. But you should also do the same before applying.
A credit score is a number that tells how good you are at managing loans or credit cards. It usually ranges from 300 to 900. A higher score (above 750) means better chances of getting loans at low interest rates. A low score can lead to higher rates or even loan rejection. If your score is low, try improving it before applying. Pay your bills on time, clear any credit card dues, and avoid taking too many loans together.
5. Always Read the Loan Terms and Conditions
Always read the loan agreement carefully. Yes, we know it’s boring and filled with legal terms, but it’s important.
Look for hidden charges like:
- Processing fee
- Prepayment charges
- Late payment penalty
- Foreclosure charges
For example, some banks charge 3-4% as a pre-closure fee if you want to pay off your loan early. So even if you get some extra money and want to close the loan, you’ll have to pay a fine.
6. Type of Interest: Fixed or Floating
Loans usually come with two types of interest rates:
- Fixed: Your EMI stays the same throughout the loan period.
- Floating: Your EMI can go up or down based on market conditions.
Fixed rates give peace of mind, but they’re usually a little higher. Floating rates can save money if market rates drop, but they’re risky.
Choose the type that matches your comfort level. If you like stability and hate surprises, go for fixed. If you’re okay with ups and downs, floating might work.
7. Have a Backup Plan for Repayment
What if you lose your job or fall sick? How will you pay your EMIs then?
It’s always good to have a backup. Keep at least 3-6 months of EMI amount in a savings account. You can also consider loan insurance that helps repay in case of an emergency. This step is often ignored by many, but it can save you from a lot of stress later.
Final Thoughts
So take your time. Understand every detail. Ask questions. Don’t just go for what the bank says; do your own homework too.
If you’reunsure, talk to a trusted friend or financial expert before making the final move.
Remember, it’s not just about getting the money. It’s about being smart with how you use and repay it.
