Planning to take loan in your 20s? 5 points to determine if you are financially ready

Over the last few years, easy and faster access to credit, coupled with the arrival of digital lenders made consumers, especially young earners, more comfortable and confident with borrowing.However, availing loan without financial planning can have dire consequences on your financial health. Following a disciplined financial approach would not only help inavailing loan, it can also help manage expenses better. Here are 5 checkpoints to be mindful of before opting for a loan:

Make sure you have an emergency fund in place

Set aside adequate emergency fund as soon as you start earning. This would come handy during unforeseen financial emergencies such as sudden job loss or severe illness, which can disrupt your regular income inflow.

Ideally, your emergency fund should be at least six times your recurring monthly expense, such as rent, existing loan EMIs and credit card bills. Creation of emergency fund shouldn’t be a one-time task. Instead, it must be increased in proportion to any increase in your recurring expenses.

Review your credit report

Credit score determines your credit worthiness basis which, lenders either approve or reject your loan application. In addition to this, it can also help avail loan at lower interest rate. Hence, it is important to review your credit report before applying for a loan. Since your credit score is computed on the basis of information provided in your credit report, it’s important to periodically review your credit report to prevent any errors or possible fraud from getting bypassed. Checking your report before applying for a loan would enable you to get the errors, if any, rectified and the corrections updated in your credit report.

Check your eligibility before submitting application

Before you apply for a loan, check whether you qualify and match the lender's eligibility criterion. This would help prevent outright rejection of your loan application. Make use of online loan calculators to assess your eligibility basis which, you may either take steps towards improving your loan eligibility, or simply opt for another lender whose eligibility criterion match your requirement.

Choose loan tenure according to your repayment capacity 

While evaluating your loan application, lenders assess your repayment capacity by computing your FOIR (Fixed Obligation to Income Ratio), i.e. the proportion of your existing income being consumed in debt repayments, including credit card bills and loan EMIs. As lenders generally prefer lending to those having FOIR upto 40-50 per cent (including EMI of the new loan), make sure you opt for the loan tenure whose corresponding EMI keeps your FOIR within this range.

If your repayment capacity is low, consider opting for longer repayment tenure toreduce your EMI outgo.You may choose to prepay your loan whenever you have surplus fund. However, while doing so, make sure that the overall savings in interest payout significantly outweighs prepayment charges levied by the lender,if any.

Compare amongst various lenders

Before zeroing in on any lender, it’s important to compare them on various parameters such as loan tenure, interest rate, processing fees, loan amount etc. Consider visiting online financial marketplace to compare and choose the most suitable lender according to your eligibility and requirement. You should also consider connecting with banks and NBFCs with whom you have an existing relationship, as they maychoose to offer loan at lower interest rate and better service terms to their existing customers. 

By Radhika Binani – Chief Product Officer, Paisabazaar.com