Loan Tips

1. Make sure a personal loan offers you the best deal

For instance, you could use them to consolidate your credit card debt, for home improvement purposes, to invest in your business or simply to take a vacation. Check if there are other types of loans that could serve your needs better. For instance, you could take out a home equity loan or line of credit. Considering that home equity loans are secured by your home, whereas personal loans are not secured loans, your interest rate is likely to be more favorable when you tap into home equity.

2. Choose the right lender

Financing sources that offer personal loans include banks, credit unions and online lenders. Each of these offers a range of interest rates, and their terms vary. That's why you should shop around and find a lender whose loan best fits your needs. For instance, Perc Pineda, senior economist with the Credit Union National Association, points out that for a $5,000, 2-year personal loan, the average rate is 9.54% at credit unions compared with 9.93% at banks.

3. Be careful with credit card consolidation

Taking out a personal loan to pay off credit card debt on more than 1 card and consolidating the payments is one of the most popular uses of personal loans. If this is your motivation for taking out a personal loan, be careful not to defeat the purpose by racking up fresh credit card debt once you pay off the old cards and have access to fresh credit.

4. Read the fine print

Be sure to ask for a full disclosure of all the loan terms and read the fine print. There are differences in the terms offered by different lenders. See if the monthly payment and repayment terms work for you. There also could be fees for late payments. The lender is looking to generate a steady stream of interest payments from you over the term of the loan, so there could also be a prepayment fee, or penalty for paying off your loan early.

5. Make sure your credit score is accurate

Your credit score could make for a significant difference in the interest rate you're offered on your personal loan, irrespective of the overall direction of interest rates. For instance, you could pay as much as 20% or higher with bad credit, while you could snag a much better 8% rate with good credit. That's why you should make sure that your credit score is accurate and continue to be responsible in your use of credit. Also, some personal loan lenders will report only the payments you miss to credit bureaus, so you could ask your lender to report your on-time payments to bolster your credit profile.

6. Watch out for origination fees

While some lenders seem to offer lower interest rates, you might find that they also tack on an origination fee that effectively hikes your interest rate. Thus, you could be better off with a lender that offers a higher rate than others but doesn’t add on any origination fees.

7. Don't take on more than you can afford

Before you apply for a personal loan, gauge your financial situation and how much you can comfortably take on. Some lenders will look to ply you with more than you can handle. That means you might end up biting off more than you can chew and fall into a debt trap.

8. Be careful about allowing automatic withdrawals

Some online lenders offer borrowers incentives to provide access to their bank accounts for automatic withdrawals of their monthly payments. In fact, they could set up the personal loan terms as such, and you would have to opt out of the arrangement. For instance, you might find that you will have to pay a fee if you prefer to pay by check. If you provide access to your bank account, though, you might find yourself out of money when you need it.

9. What if you encounter difficulties with repayments?

Find out what your options are in case you run into difficulties making your payments. Is there any potential to modify the terms of the loan? Also, is the lender open only to arbitration if any differences arise? Or can you go through the court system?

10. Fixed rate or variable rate?

Typically, you will start off with a lower rate on a variable-rate loan, but you also will be taking on interest rate risk. As interest rates rise, your variable rate also will rise, so your monthly payments will be higher. With a fixed rate, your payments will remain the same for the term of the loan regardless of interest rate movements.

11. Do not chase the cheapest rate of interest.

Find out a competitive rate and focus on the other aspects of the loan. Cheapest is not the best deal so look beyond it.

12. Choose a floating rate of interest over fixed

Choose a floating rate of interest over fixed, even if the latter has an attractive rate offer. There will be twists in fixed products. Many of you miss to note that there's a foreclosure penalty applicable within the fixed term. And moreover, the margin changes after the fixed period is over, if the offer rate was for teaser period.

13. Ensure you opt for a lender who offers daily reducing balance

Ensure you opt for a lender who offers daily reducing balance and not monthly. It will not make any difference unless you plan a partial repayment. In a monthly reducing balance plan, even if you partially close an amount in between two EMI dates, they consider the repayment only from the next EMI date, thus making you pay interest even on the repaid sum for those days! You will not know, but it will cost you heavy.

14. Do not get biased by your previous experience with another product

Do not get biased by your previous experience with another product, or what your friends, relatives & colleagues. This is finance, a pure mathematical product, so do your maths & decide accordingly.

15. Read all online remarks, which you will anyways do.

But 99% of them are otherwise motivated. You will find that those who are badmouthing a lender probably use funny dummy ID-s like kingpin, lisahayden, bigboy, greatguns, etc. So before taking their comments seriously have a look at the IDs they've used.

16. Your wealth manager, bank relationship manager, chartered accountant, tax-planner and your finance controller or CFO in office are great.

Seek their guidance to reach the right mortgage broker. Mortgage is a specialised product. Have you ever heard a heart surgeon treating patients for skin rashes? Similarly, a mortgage broker selling mutual fund and insurance will be as good as a real estate broker selling tour-tickets and running an STD shop with photocopy machine! Therefore, chose the best in industry.

17. Always ask for a comparison between at least 6 major lenders

Always ask for a comparison between at least 6 major lenders from your mortgage adviser. And again, do not decide on basis of the lowest rate. Look at the base rate, the margin offered, whether any other product is being pushed, how many times the lender has reduced rate in past two years, what is the maximum tenure offered, and how is the eligibility calculated and most importantly whether a property similar to yours has been funded by this lender earlier.

18. Try opting for a new-age product which saves you money

Try opting for a new-age product which saves you money. Standard vanilla home loan are cliche' and won't work for most of my clients who have surplus funds and taking the loan for tax-savings or waiting another property to be sold and pay off their debts. These days, borrowers have various requirement rather than just borrowing for the need of money.

19. Time taken for processing the loan.

Time taken for processing the loan. This may sound unimportant, but my noting it last doesn't indicate that at all. When the builder starts sending you delay-penalty notices or the seller withdraws from the deal or increases the sale value, trust me, this becomes the top priority on the chart. What will be the point of checking out so many lenders and settling for the one who can only offer, but cannot execute?

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