Personal loan 5points

In a normal process of getting the benefit of a personal loan you have to make an application to the bank. After considering the situation on the income front and other details the loan is then approved and disbursed.There is also a reverse situation where banks actually approach you with an offer to take a personal loan from them. In this case, the background work is already done by the banks.

Any loan taken by you will represent a risk in terms of repayment for you as well as your family because this is a liability that has to be repaid to the lender.The major risk is that if anything happens to the borrower then the family might be saddled with a loan they might find difficult to repay under the changed circumstances.

There are different methods available for you to repay the personal loan that you have taken. But there is a need to match the options along with the requirements so that a proper balance is achieved.In most cases, the personal loan has to be repaid in monthly equal instalments or EMIs and this requires extreme care and diligence on your part so that there is a system in place to ensure that the payment is not disrupted.

There are several repayment methods that are available for you when you have to pay back the personal loan. You can select one of the routes available depending upon your convenience and the facility offered by the bank. In most cases, the personal loan has to be repaid in equal monthly instalments (EMIs), so it makes more sense for you to link this repayment with some receipt that comes in on a regular basis.

Many people just take a look at the absolute rate that is quoted on a personal loan and then select the one that has a lower rate of interest. If you do this then there is a chance that you might not be making the right decision. Along with the absolute rate it is important for you to consider the nature of the interest rate calculation. This will actually determine the final effective cost for you.

For every personal loan, you will have to repay the loan in equal instalments and the repayment will consist of interest payments as well as the principal amount repaid.To calculate the total interest paid on the loan you will need to take into account all the amounts that you have repaid over the life of the loan. This will also include the repayments on account of upfront instalments that are recovered from you.

In case of a reducing balance interest rate calculation, the various repayments of the loan have to be taken into consideration for future interest workings. The time period after which the repayment is adjusted in the workings is called rest.There is a monthly rest whereby the interest calculation breaks each month’s EMI into the interest and the principal and then adjusts this figure immediately to get the reduced principal figure for the future interest calculation.

The reducing balance rate of interest takes into account the amount that is repaid against the loan while making the interest calculation.The eligible amount goes on changing as the loan is repaid over a period of time. This is the reason why you need to constantly calculate the amount that remains on the loan.

In a flat rate interest calculation, the principal amount remains constant throughout the life of the loan for the purpose of interest calculation.The amount for which the loan is sanctioned becomes the base on which you have to apply the flat rate of interest for the entire duration of the loan. So for example, a loan of Rs 1.5 lakh taken for 3 years at 15% interest rate will have a total interest cost of Rs 67,500 over the 3-year life.

In a personal loan, the base amount is a key figure that has to be determined. This is the figure on which interest calculation is done, and it then proceeds based on the method chosen.You should not calculate the interest based on the amount received by you because this will give an incorrect picture. The proper base is actually the total amount of the loan that is available to you.