Know This Before You Apply for a Personal Loan for Emergency

Updated on: 14 Dec 2021 // 24 min read // Personal Loans
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Whenever you are facing a financial emergency, your first reaction is to check your bank balance and the value of your investments. While it is true that you have saved that money for unexpected situations, but you should not liquidate investments that are meant for your retirement corpus.

Then, how do you arrange for cash during an emergency? Borrowing money from friends and family is not an option always. For, there is no guarantee that they will have the type of money you require. Besides, it may bring a lot of embarrassment at the same time. Herein, a bank loan could be one of the best options when you require some cash for the short term.

With multiple lending institutions offering Personal Loans for a variety of requirements, you can handle any emergency situation effortlessly.

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Things to know before applying for a Personal Loan

To ensure that you can maximize the benefits of a Personal Loan and save yourself from the possible downsides of bad debt management, here are some important things that you must know about:

  • Eligibility criteria:

    Though most lenders follow standard eligibility criteria, there are some finer nuances that you must pay attention to before choosing lenders to apply for a loan. Loan interest rate, processing charges, tenure, CIBIL score, minimum disposable income, ownership proof, age, work experience, etc. are some of the factors that you must compare before finalizing a Personal Loan offer from any bank. Apply with only those lender(s) where eligibility criteria match with your profile.

  • Annual Percentage Rate:

    Do not base your decision solely on the interest rate applicable to the loan. For a more accurate estimate, you must check the APR.

    APR or Annual Percentage Rate is the total cost that you will have to bear in a given year. It includes charges as processing fees, taxes, foreclosure charges, late payment charges, etc. When you compare APR of different lenders, you will realise that the offer with the lowest interest rate actually might not be the best option for you.

  • Interest rate structure:

    You need to check the interest rate structure followed by the lender before availing a Personal Loan for an emergency. While some lenders follow fixed-rate structure, others follow reducing balance structure. As the repayment tenor for Personal Loans can extend up to 60 months, opting for a reducing balance interest rate structure will help you save substantially on the interest cost. It will shrink the amount of EMI to serve.

  • Processing time:

    As the situation you are facing is urgent in nature, you obviously need the money in a quick time. Usually most financial institutions complete the processing of a Personal Loan in a few working days, but the actual duration might vary from one day to one week. Depending on the urgency of the situation, you need to select the lender who can process your application in a quick time and with minimal documentation formalities.

  • Borrow what you need:

    When you enjoy a good credit score, most lenders will offer you high-value loans and that too at attractive interest rates. But you need not get carried away by the fact that you can access a greater sum of money; instead, you must only borrow that much amount which you require. A Personal Loan comes with an interest cost, and if the money ends up in your account for a couple of months, you will end up paying interest for the amount which you do not need. For instance, HSBC Personal Loan is available for amounts ranging from Rs. 75, 000 to Rs. 30 Lakhs. So, you should choose the amount that you actually require even if your eligibility is for Rs. 30 Lakhs.  

  • Repayment tenor:

    Apart from the interest rate, another factor that can determine your Personal Loan EMI is the repayment tenor. The repayment tenor available for Personal Loans varies between 12 months to 72 months. Longer is the repayment tenor, lower is the EMI, but higher is the total interest cost and vice-versa. So, you must choose the repayment tenor, which gives you the EMI amount that you can easily afford. If your financials allow, you should opt for the shortest repayment tenor as it would help you pay off the loan quickly and keep your interest costs at a lower level.

  • Option for foreclosure:

    Usually, the emergency situation you are facing is a temporary phenomenon, and you are availing a Personal Loan as you require funds immediately. It might so happen that you receive your money, which you were expecting after a few months into the Personal Loan. In such a situation, you must opt to foreclose the loan to save money on the interest expenses. Though, you will have to pay the foreclosure charges levied by the lender. While some Personal Loans, such as J&K Bank Personal Loan, do not levy any foreclosure charges, while an HSBC Personal Loan, levy up to 3.75% of outstanding amount as a foreclosure charge.

  • Negotiate for a better offer:

    With multiple financial institutions offering Personal Loans, you should not accept the first offer that you get. Negotiate with the lender to get a better offer. Remember that a Personal Loan is a long-term commitment, and even a slight reduction in interest rate can translate into substantial savings.

Therefore, you must never be overwhelmed by the emergency. Instead, adopt a patient approach and compare all these essential parameters before selecting a final offer.

Also Read: Top 8 Instant Personal Loan Online Platforms in 2019 – A Quick List

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