It is true that life is uncertain. Despite your best efforts sometimes the situation may arise when your financial planning may go haywire and you may have to resort to personal loans from financial institutions. Personal loans are mostly collateral free, unsecured loans which can be availed for a wide range of purposes like medical expenses, education, vacation, etc. Personal loans are generally given for a short tenure of 6 to 60 months and if the borrower can prove his creditworthiness then it can be disbursed within a short span of time. Here are some tips for the beginners to avail a personal loan.

• Understand your CIBIL Score

The Reserve Bank of India in January 2001 issued a license to the first credit information company in India which is popularly known as CIBIL or Credit Information Bureau India Limited. Your CIBIL score is a three-digit number whose value ranges from 300 to 900. This represents your individual credit history and your credit rating. 900 is the best possible CIBIL score, if you do not have any credit history then your CIBIL score would be -1; similarly, if your credit history is less than 6 months then your CIBIL score would be 0. It generally takes 18 to 36 months to build up your credit score.

The CIBIL score plays a very important role in the approval of the personal loan. Most of the traditional financial institutions expect you to score more than 750 points to be eligible for a personal loan. Generally, if you have a good credit history then you can avail a personal loan with a low rate of interest.

• Assess the Total Cost of the Loan

The most important work before finalising the bank or any other financial institution from where you are going to avail the loan is to compare them elaborately. The assessment of the total cost of the loan is an important aspect which must be taken care of. The interest of the loan is not the only cost, which you should take into consideration. Take account of other hidden costs like prepayment charges, processing fees, penalties, etc before applying for the loan.

• Check the Interest Rates

The interest rate for the personal loan starts from 11.5% and may go to as high as 25%. But there are many other facts which must know while availing a personal loan. Try to understand the nature of the rate of interest on your personal loan. While most of the banks offer a fixed rate of interest, some of them may offer you reducing balance interest rate. The value of EMI of the loan depends a lot on the interest rate.

You have to pay a fixed rate of interest on the principal amount for the entire tenure of the loan when you avail fixed interest rate. Here your EMI would be same for the entire tenure of the loan. When you opt for the reducing balance interest rate, a part of your EMI would directly go towards the repayment of the principal amount of the loan. Here your principal amount would get lower as you start repaying your loan. When the interest is calculated on the remaining value of the principal amount, your EMI value would also be reduced accordingly.

• Finalise the Tenure of the Loan

The last thing which you should keep in mind while availing a personal loan is the tenure of the loan. Generally, the personal loan is availed for a period of 18 to 60 months. You should fix the tenure of the loan based on your repaying capacity. The tenure of the loan and the EMI are inversely proportional to each other. This means as you choose a longer tenure for the loan, your EMI value subsequently decreases. But, in a long tenure, you end up paying more interest for the loan. So, be cautious while deciding the tenure of the loan.

So, these were a few guidelines for the beginners, who want to avail a personal loan.