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    How to Choose the Right Type of Loan?

    Lakisha DavisBy Lakisha DavisAugust 16, 2024
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    How to Choose the Right Type of Loan?
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    To manage your finances effectively, one must select the right type of loan. Several financing options in India make it hard to determine which one will be appropriate.

    As every kind of loan has its terms, rates of interest, and eligibility criteria, you need to understand these factors before making the big decision. This article provides all the information you need to choose a loan.  

    Why Choosing the Right Loan Matters

    Choosing the right loan isn’t just about securing the funds you need; it’s about doing it in a way that works best for your financial situation.

    Whether you’re looking to buy a home, start a business, or fund a big life event, the type of loan you select can significantly impact your finances. Get it right, and you’ll manage your repayments with ease. If you get it wrong, you will end up struggling with unexpected costs and unfavourable terms.

    Types of Loans in India

    Let’s break down the types of loans in India. Knowing what’s available will help you make an informed decision.

    1) Home Loans

    A home loan is your go-to if you dream of owning your own house. These loans are often long-term, with the repayment tenure stretching to thirty years. The property purchased becomes collateral, implying that if an individual defaults on payment, the bank or financial institution can sell the property to recover the amount lent. The interest rates can be either fixed or floating, and they’re usually lower than other types of loans because they’re secured.

    When to choose: A home loan is likely your best option if you plan to buy a house and need a considerable amount of funds.

    2) Personal Loans

    These are unsecured loans, i.e., there is no need for collateral; therefore, they can be used for almost any purpose, including funding your wedding or consolidating debts. However, the interest rates are higher than secured loans.

    When to choose: If you need quick cash for various personal expenses and don’t have assets to offer as collateral, a personal loan is the way to go.

    3) Loan Against Property

    If you own property and need funds, consider a Loan Against Property (LAP). This kind of loan is secured where residential or commercial property is put as collateral. The interest rates are lower than personal loans, and such funds can be used for any purpose, i.e., business expansion, wedding expenses, or meeting medical costs.

    When to choose: If you need a lot of money and have a property you can pledge, a loan against property is an excellent option.

    4) Business Loans

    Thinking of starting or expanding your business? A business loan might be what you need. These loans could be secured or unsecured and customised to fit the requirements of various businesses. You can use the funds for various purposes, from buying equipment to expanding operations.

    When to choose: If you need capital to start or expand your business and have a solid plan, a business loan is a good fit.

    5) Education Loans

    Education loans cover higher education costs both in India and globally. Some even offer a grace period until after graduation, giving students more options while repaying their loans.

    When to choose: An education loan will help you achieve your academic goals without financial strain, especially if you want to pursue higher education.

    Key Factors to Consider

    Now that we’ve gone through different types of loans available in India, let’s talk about factors that should cross your mind before making a decision —

    1) Interest Rates

    The interest rate plays a vital role, as it determines how much extra money over and above the principal sum would be paid by a borrower at the end of the loan term. Home loans, particularly loans against property, are generally secured with a lower interest rate than an unsecured personal loan. Remember to compare the rates from different lenders before deciding.

    2) Loan Tenure

    The tenure of loans plays a crucial role in planning monthly budgets for their repayment. Longer tenures lead to low EMIs but a high interest rate over time, whereas a loan with a short tenure results in a high EMI but low interest payments in total.

    3) Processing Fees and Other Charges

    Additional costs like processing charges, prepayment charges, foreclosure charges, etc., should be considered, as these could significantly increase the overall cost of borrowing money from any financial institution. Sometimes, a lower interest rate comes with higher processing fees.

    4) Your Credit Score

    Your financial report is your credit score. The higher one’s credit score, the better his/her chances of loan approval and securing a lower interest rate. If you have a poor credit score, it will be wise to take some time to improve it before applying for a loan.

    5) Prepayment Flexibility

    Some lenders allow prepayment without charging penalties; hence, borrowers can save huge amounts in terms of money paid back as interest.

    Mistakes That Need to be Avoided

    Common mistakes you must avoid when looking for a loan are —

    1) Failure to Shop Around

    Don’t just accept the first proposal. Explore, compare choices, and select your perfect match.

    2) Borrowing More Money Than Necessary

    You may be tempted to take out a bigger loan “just in case”. But remember, you will pay interest on the whole amount. Only borrow what you require.

    3) Not Reading the Fine Print

    As a rule, go through every word of the agreement before signing it. Do not ignore anything in fine print; it may catch you unawares later.

    Conclusion

    Selecting the correct type of loan is a challenging task. By familiarising yourself with various types of loans in India and examining elements like interest rates, tenure, and borrowing ability, you can choose the most suitable credit option for your financial prospects.

    Whether considering a loan against property or a personal loan, research should be done first to see if it satisfies your requirements and objectives.

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    Lakisha Davis

      Lakisha Davis is a tech enthusiast with a passion for innovation and digital transformation. With her extensive knowledge in software development and a keen interest in emerging tech trends, Lakisha strives to make technology accessible and understandable to everyone.

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