Important Things to Consider While Taking a Loan

Getting a loan from a financial institution for any reason is a challenging feat! It may appear that all the banks are eager to lend to their customers, getting a loan sanctioned is a wearisome task! Before heading over to your local bank or outreaching to a small to medium business loan specialist such as SummitFR, it is best you get acquainted with how loans work. As the saying goes, prevention is better than cure, it is best if you have a basic knowledge about this financial product to avoid nasty surprises in the future.

Given below are three tips that will keep you on alert while you sign the dotted line on the loan agreement:

1. Conditions for Eligibility

The crude way of calculating an applicant’s eligibility for a loan is to calculate the CIBIL score for the loan. Secondly, the financial institutions generally limit the EMI (equated monthly installment) for the loan at 40 – 50% of the income of the applicant (basic sum + dearness allowance). Allowances and dearness are not included in this calculation. The eligibility of an applicant goes down further if the same has an outstanding loan from another bank or the same.

Some banks find it a turnoff if the applicant has a higher number of dependents on him/her. As per their policies, a higher number of dependents mean higher chances of failure to repay the loan amount.

The financial strength of an applicant also adds to the momentum for a successful loan application. Applicants who have a steady income source find it easier to get their loans sanctioned in no time. On top of that, the age of the applicant also dictates whether the bank will sanction the loan application or not.

2. The Loan Type

The type of loan dictates the base interest rate. If we consider home loans, there are two types of interest rates i.e., floating and fixed. If we emphasize on the type, the rate of interest in a fixed rate loan does not change with the fluctuations in the financial market. On the other hand, the rate of interest in a floating rate loan varies and fluctuates with the market conditions.

Depending on the type of loan the applicant chooses, the EMI either tends to remain constant or fluctuate with the changing market conditions. In case an applicant chooses a floating rate loan, the person may face a sudden spike in their EMI rates, although this varies from bank to bank.

3. The Loan Agreement

The loan agreement is the document that binds the applicant with the rules and regulations of the financial institution. The clauses of the contract often appear to the applicant as incomprehensible and can even conceal a few hidden details that need to be addressed with rigor. As per the usual understanding of the average Janes and Joes out there, the term ‘default’ is often comprehended as the inability of an applicant to pay their EMI on time. But the definition of the term ‘default’ is different for different banks and institutions. Some financial institutions define ‘default’ as the expiry of the applicant, getting a divorce from their spouse (in case of joint applications) or if the borrower is associated with any form of legal litigation.

It is evident from the above discussion that one should read the terms and conditions of the application before signing on the dotted line.