New Delhi. Loan has become a necessity for everyone in today’s times. People easily take loans from banks or financial institutions for buying a house, car, education, medical emergency or any major expense. But many times, in a hurry to sign the loan contract, people do not pay attention to some words which have a direct impact on their pockets. The result is that later the EMI increases, more interest has to be paid or many extra charges appear.
If you are planning to take a loan, then understand these 6 words thoroughly. With this you will not only be able to take better decisions but will also be saved from any kind of financial trouble.
1. Processing Fee
Banks and NBFCs usually charge a processing fee to complete the loan application process. This fee is a fixed percentage of your loan amount, which can range from 0.5% to 3%. This amount is non-refundable, whether the loan is approved or not. Choosing a loan with low processing fees can save you in the long run. For example, if you take a home loan of Rs 10 lakh and the processing fee is 1%, you will have to pay Rs 10,000 just to process the application.
2. Loan Tenure
Loan tenure is the period for which you promise to repay your loan. This can range from a few months to 30 years, depending on the type of loan you are taking. If the tenure is longer, EMI will be less, but interest will have to be paid more. If the tenure is less then the EMI will be slightly higher, but the total interest will have to be paid less.
3. EMI Calculator
Today every bank and financial website provides EMI calculator, through which you can know the EMI of your loan in advance. In this you have to enter only 3 things – loan amount, interest rate and tenure. The advantage of using an EMI calculator is that you can get an idea of the actual cost of the loan in advance. You can compare EMIs of different banks. Budget planning becomes easier and chances of missing EMI are reduced. Every person must use EMI calculator before taking loan.
4. Fixed Rate of Interest
By taking a fixed rate loan, the interest rate of your loan remains the same for the entire period i.e. whether the interest rates rise or fall in the market, your EMI does not change. Sometimes the initial interest rate of fixed rate loan can be higher than that of floating rate. Still, having stable EMI makes it a safe option for many people.
5. Secured vs Unsecured Loans
There are two types of loans – secured and unsecured. Let us tell you that for a secured loan, some property (like house, car, gold) has to be mortgaged. The interest rate is lower. Home loan, auto loan, gold loan come in this category.
In an unsecured loan, no property has to be mortgaged. Therefore the interest rate is slightly higher. Personal loan, credit card loan come in this category.
6. Annual Percentage Rate (APR)
Often people choose a loan just by looking at the interest rate, but the Annual Percentage Rate i.e. APR is more important than this. APR includes interest rate, processing fee, filing charge, insurance, other service charges etc. APR tells you what percentage your loan actually costs per year. For example, the bank says that the interest is 10 percent, but including processing fees and other charges, the APR can be 12 percent. The best way to compare is by looking at the APR.
