Applying for a Personal Loan? Things to Know Before Applying!
Credit can be availed in various forms, including mortgages, credit cards, purchase financing, automobile loans, and personal loans. Every kind of credit serves a specific purpose for the objective you might have. This objective can be purchasing a car or house, or allowing you to break up your huge expenses into manageable monthly installments.
How does Personal Loan Work?
Personal loan in the UAE is a kind of credit, which helps you in making huge purchases or consolidating debts having high rates of interest.
Since personal loans usually have lower rates of interest as compared to credit cards, you can use them for consolidating various debts on credit cards into one low-cost payment every month.
Credit can prove to be a powerful financial instrument. However, opting for any kind of loan is a serious liability.
Before deciding to apply personal loan in UAE, it is essential to carefully take into consideration the pros and cons that may impact your unique credit situation.
What does a Personal Loan mean?
While applying for a personal loan, you can ask for borrowing a specific amount of funds through a lender such as a credit union or a bank. The funds from a mortgage should be utilized to make payment for a house. You can get a car loan for financing your car purchase.
As far as personal loan is concerned, it can be used for several purposes. You can opt for a personal loan to get funds for your medical expenses, educational expenses, buying an expensive yet essential household item like a new appliance or furniture, or for consolidating your debts.
Making repayment of your personal loan is not same as making repayment of the debts on your credit card. Through personal finance, you can pay installments of fixed amounts over a determined tenure, till the debt is repaid completely.
Before applying for a personal loan online, you must be aware of the following common terminologies.
- Principal: The principal is the amount of funds you have borrowed. For instance, in case you have applied for personal finance of 10,000 dirhams, then this amount is your principal. When the loan provider is calculating the amount of interest they would be charging, their calculation is based on the principle amount you owe. When you continue repaying the personal loan, this amount reduces.
- Interest: At the time of obtaining a personal loan, you accept the condition of making repayment of your debt along with the interest. This interest is the loan provider’s charge in return for allowing you to make use of their funds and repaying it later.
- You will have to pay an interest charge every month in addition to that portion of the payment, which is made for decreasing the principal amount. This interest rate or profit rate is generally expressed in the form of a percentage.
- APR: Whenever you opt for any type of loan, apart from the interest, your lender generally charges a fee for offering you the loan. APR (Annual Profit Rate) includes both, your rate of interest as well as your lender fee for providing you a clearer picture of the true cost of the loan.
- Making a comparison between different APRs is an efficient way of comparing the value and affordability of various personal loans.
- Term: The tenure or the timeframe in which you have to make the repayment of your loan is known as the term. When your lender gives approval for your loan application, they will provide you clear information regarding your loan term and the rate of interest.
- Monthly payment: During the tenure of the loan, you will have to make payment to your lender every month. Such a payment includes money that reduces your principal amount and the part of the total interest amount you will have to pay throughout the life of your loan.
- Unsecured loan: Generally, personal loans are unsecured loans. This means you do not need any collateral for these loans. In case of an auto or home loan, usually the actual property you are purchasing is considered as the collateral by the lender. Any personal loan is generally secured by the reliable credit position of the cosigner or borrower. However, a few lenders may also provide secured personal finance, wherein you will need collateral. These loans offer better rates as compared to an unsecured loan.
How to Apply Personal Loan in UAE
While asking your lender for any type of credit, you will have to follow the process of application. However, before submitting your application for a personal loan, it is necessary that you go through your credit score and credit report. This will help you in staying aware of what the lenders may find when they review them.
After reviewing your credit and taking necessary measures (if needed) depending upon its condition, you may then apply for a personal loan via any financial institution like a credit union, bank, or an online lender. These days, the most convenient way of applying for a personal loan is online. However, no matter what your mode of application is, the lender will go through your credit scores and report.
Usually, when considering your credit score while checking your application, the lender qualifies a higher score for better rates of interest and loan terms on the loans you are looking for.
The lender may also consider your DBR (Debt Burden Ratio). DBR is the number, which makes a comparison between the total amount you are liable for monthly and the total amount you are earning.
Minimizing the Effect of Inquiries
Whenever a lender checks your credit report after receiving your credit application, there is a hard inquiry noted on your credit report. These hard inquiries haunt your credit reports for a long time, with their effect diminishing with time.
However, a lot of hard inquiries mentioned on your report in the short-term may have a bad impact on your credit ratings.
If you have applied to multiple lenders for doing comparison shopping, make sure you do this in short time duration for minimizing the effect of hard inquiries.
Usually, the models for credit scoring count more than one hard inquiries regarding the same kind of credit product as one event only when they are occurring in a short timeframe, say around a few weeks. It is recommended that you do not stretch your applications and this comparison shopping over a duration of months.
You also have an option of asking your lender if they can preapprove or prescreen you for a certain loan offer. This preapproval is generally considered as a soft inquiry, which does not really impact your credit scoring.
In a Nutshell!
It is necessary to manage any kind of credit you are using wisely, personal loans included. Your personal loan can be really helpful if managed properly. However, managing the debts is something you must never do lightly. You must always look carefully at your complete financial situation before pulling the trigger.
Before you make any kind of essential credit decision, it would be best if you are aware of the application process, basic requirements, and the common jargons related to the loan or credit. So is the case of personal loan.
When you apply personal loan in UAE, you must also review your own credit report and score for understanding your present credit standing. It will also help you in having better knowledge about the impact of your decision on your credit in the future.