Thinking of applying for a personal loan? Discover the 9 things to do before borrowing. Save money, avoid mistakes, and borrow smarter.
Taking a personal loan can feel like a financial lifesaver—quick approvals, no collateral, and money in your account in just 24-48 hours. But before you take the plunge, pause. A personal loan, though convenient, is also one of the most expensive forms of debt.
It’s easy to apply, but what’s not easy is living with high EMIs and interest if you don’t plan it right.
So, before you sign that dotted line, here are the 9 most important things to do before taking a personal loan—written with care to help you borrow smartly and sleep peacefully.
Evaluate Why You Need the Loan
Before applying, ask yourself:
“Do I really need this loan, or do I want it?”
Many people take personal loans for vacations, buying phones, or even investing in stocks. But remember: a personal loan carries interest rates between 10% to 24%. That makes it one of the most expensive liabilities you can carry.
Smart use cases:
- Emergency medical expenses
- Wedding expenses
- Home renovation
- Debt consolidation
💡 Tip: If your need isn’t urgent, consider saving up instead. Or look at alternatives like borrowing from family or a gold loan, which may be cheaper.
Know Your Credit Score
Your credit score is like your financial report card. Lenders use it to decide:
- Whether you qualify
- What interest rate to offer
- How much loan amount to approve
A score above 750 gets you the best deals. Lower than 700? It’s time to improve it.
How to check your score for free?
Try:
👉 https://www.cibil.com
👉 https://www.paisabazaar.com/
Review your credit report for errors and fix them. This one step alone can save you tens of thousands of rupees in interest.
Compare Interest Rates and Terms
Don’t settle for the first lender that says “Approved!”. Take your time to compare personal loan offers from:
- Banks
- NBFCs (like Bajaj Finserv, Tata Capital)
- Fintech apps (like PaySense, CASHe)
Even a 1% difference in interest rate can make a big difference.
Example:
On a ₹5 lakh loan over 5 years:
- At 12%: You pay ₹1.67 lakh in interest
- At 15%: You pay ₹2.13 lakh
Savings: ₹46,000
Use loan comparison tools like:
👉 https://www.bankbazaar.com/personal-loan-interest-rates.html
Also, check:
- Processing fees
- Hidden charges
- Late payment penalties
- Prepayment clauses
Check the Total Cost, Not Just Interest
Many borrowers focus only on EMI and interest rates. But your real cost includes:
- Processing fees (1-3%)
- Documentation charges
- Prepayment/foreclosure fees
- Insurance bundling (often added silently)
Always ask for the APR (Annual Percentage Rate), which reflects the true cost of the loan.
👉 Use this handy Personal Loan EMI Calculator to make an informed decision.
Know Your EMI Capacity
Don’t over-borrow. Don’t over-stretch.
A good rule of thumb:
Your total EMIs (existing + new loan) should not exceed 40% of your take-home pay.
Example:
- Net income = ₹60,000/month
- Safe EMI limit = ₹24,000
If you’re already paying ₹15,000 as EMI for a car loan, the new loan EMI should be ≤ ₹9,000.
Factor in:
- Monthly expenses
- Emergency buffer
- Investments for goals (retirement, child education)
⚠️ Warning: Missing EMIs hurts your credit score and peace of mind.
Read the Loan Agreement Carefully
The loan agreement contains more than boring text—it contains your legal obligations. Always check for:
- Prepayment/foreclosure charges
- EMI bounce penalties
- Interest calculation method (flat vs reducing)
- Default clauses
Some lenders include insurance policies in loan packages. While helpful, it should be optional, not forced.
👉 Pro tip: Get a copy of the agreement before you sign and read it at leisure.
Understand Prepayment & Foreclosure Rules
Life is unpredictable—you might want to repay your loan early. But can you?
Many lenders:
- Don’t allow part-prepayment in the first 6-12 months
- Charge 2-5% foreclosure fees
- Limit the number of prepayments
Choose a lender that offers:
- Flexible prepayment
- Low or zero foreclosure penalties
This flexibility helps you save interest and become debt-free faster.
Don’t Apply with Too Many Lenders
Multiple loan applications lead to multiple hard inquiries on your credit report—this reduces your score and makes you look credit-hungry.
Instead:
- Use aggregators like Paisabazaar or Cred to compare offers without hard inquiries
- Apply to 1-2 shortlisted lenders at most
Result? Better chances of approval + less damage to your score.
Keep Your Documents Ready
Common documents required:
- PAN & Aadhaar
- Salary slips or ITR (last 2–3 years)
- Last 6 months bank statements
- Address proof (utility bill, rental agreement)
Ensure:
- Salaries are credited to your bank account
- No discrepancies in signatures or KYC
- Documents are recent and legible
The smoother the documentation, the faster the approval.
Conclusion: Borrow Responsibly, Live Peacefully
A personal loan, if taken smartly, can help you in times of need. But a careless loan can lead to years of regret.
✅ Before you take a personal loan, always:
- Think, plan, and compare
- Read every clause
- Borrow only what you can repay
If you follow the above 9 steps, you’ll protect your credit score, save money, and live debt-free sooner.
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