The Do’s and Don’ts of Personal Loans

In today’s fast-paced lifestyle, everyone is faced with situations where they need immediate cash for an emergency or unexpected expenditure. Apart from friends and credit cards, personal loans are a good way to meet such money requirements.

The best thing is that the market for these personal loans is growing and they come in many flavours suiting everyone’s needs. As banks and lenders compete with each other, the consumers also benefit from lower interest rates and speedy approvals. The lenders have also increased loan eligibility by reducing the barriers and streamlining loan requirements. Here are a few things that you need to know to help you pick the best personal loan for your needs.

Can you afford the loan?

The most important thing to consider before you take a personal loan is to make an assessment of your repayment capacity. The best way to do so is work backwards. Start with making a thorough assessment of your financial situations and calculate the maximum EMI you can afford to pay per month. Then based on the interest rates offered by lenders work backwards to calculate the total loan amount you can avail. This way you will know that you are borrowing only as much as you can afford without hurting your finances.

The formula to calculate the Equated Monthly Installments (EMI) is as follows:


  • P is the Loan Amount
  • r is rate of monthly interest rate calculated as Annual interest/12
  • n is the tenure of loan in months

Let’s say you want to take a personal loan for $10,000 for a period of 3 years. The prevailing interest rates are 8% per annum. The EMI for this loan will be:

EMI = 10000*8%/12*(1+8%/12)^36/((1+8%/12)^36 – 1)

\= $313.36

The borrower should check if he can afford this payment every month, otherwise he should consider borrowing for a lower amount or a longer tenure.

Type of Loan

Personal loans are available as unsecured personal loans or secured personal loans. In an unsecured loan, there is no need to put collateral against the loan. Secured loans, on the other hand, are backed by an asset such as a house or a car. Secured loans generally offer lower interest rates and also have favorable loan repayment terms compared to unsecured loans. So, if you have collateral to offer such as a car, you will be able to afford a higher amount of loan at lower interest rates.

Compare loan prices

Once you have decided to take a loan, it is time to approach many lenders and compare the rates they are offering. You can bargain with the lenders and go with the one providing the best deal, specially the interest rate. You also need to be wary of hidden costs such as late payment fees, prepayment charges, etc.

Terms of the loan

Finally, apart from the loan prices and costs, you also need to review the various terms of the loan. It’s a good idea to read the terms and conditions in detail and ask the loan agent any questions you have in mind.

To conclude, a personal loan is a good way to meet unforeseen expenditure. With a little bit of planning, information, and negotiation with the lender you will be able to get a good deal and manage your finances well.