Have you taken Loan, at any point of time in life or do you think you will need take loan in future ?

Then this post is for you, learn what to ask or check and make smart decisions.

Lets first look at the types of loans which are available in the market.

Lets get straight to what you need to know before you take a loan

1. Impact on credit score

What kind of loan you are taking – is it for meeting your daily needs like groceries, paying rent, shopping for small items like clothes etc. Then think twice before you take that loan, the more often you take a loan or you enquire about the loan, it effects your credit score.

When you draw down loan for buying smaller things, it given indication that you do not have enough money to meet you basic needs and there is possibility that you may default with slight change in circumstances, which does not just reduces you credit score but also increase the rate of interest at which loan will be available to you in future.

2. Options available to you

Let say to need money to pay rent today and your salary is due after a week. What do you do?

Simple answer is draw a Pay day loan i.e. loan which you can take on upcoming salary for 5-20 day with interest of 2% day.

Before you reach out to draw that loan, you should evaluate what options you have available – can you just make payment by your credit card (which can be used with no cost), can you draw down some extra money from your existing personal loan at far lesser cost and pay back soon or simply take money from your friend for 10 days ?

It will help you thinking through the requirement and type of loan which you may need.

3. What is the Interest cost

Pay day loan – 60% per month (2% daily), to be paid back in 5-15 days

Credit card – 30%- 40% per month (after due date), to be paid back in a month

BNPL (buy now pay later) – 20% – 30% per month, 30 days to 36 months depending on size

Personal loan – 14% – 25% per month, 12 months to couple of years

Home loan – 5 to 14% per month, 2 years to 30 years

So, figure out the purpose and duration you need the money for and use right kind of loan.

4. What are the other costs associate with taking and paying loan

Is there any processing fees or disbursement fees ?

Are there any legal documentation charges ?

Charges for credit score ?

Loan conversion/ restructuring charges ?

Will there be any late payment penalty apart from interest ?

Early payment charges to close loan before scheduled date ?

There can be many other names but be sure to ask for all the charges involved!

5. How the interest will be calculated

Will it be calculated on the total loan amount or it will be calculated on the reducing balance ?

Let me explain by an example – Assume you took a loan of 25K to buy something, and you are suppose to pay 2500 of principal amount every month and 2% interest per month i.e. 500.

So in 2nd month, your interest will be calculated on 25000 or 22,500 ?

Depending on what you have signed up for, if you have signed-up for interest on total loan amount then your interest payment in 10 months will be 5000, but if you signed up for reducing balance then you interest payment in 10 months will be 2,750.

6. Early payment restriction and charges

Its easy to take loan, but many time its harder to pay back the loan especially when you want to close it before scheduled time.

Many financing companies have restrictions on early payment of the loan and even the ones which allow it have the pre payment penal charges like 2-5% of the loan amount.

So before you sign-up for the loan, check that there are no such restrictions or charges!

If you take all the above points in the account, then you can not only make right decision on the type and cost of the loan, but also you will save yourself from lot of stress which come along when you discover unexpected charges or terms which you didn’t know at the time of taking loan.

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