Today, we see a surge in the number of people opting for a personal loan, especially to fund their big-ticket purchases. A personal loan simply refers to the unsecured loan that is taken by an individual from a bank or from a non-banking financial company (NBFC) to meet their personal needs.
A personal loan, unlike a home or car loan, is not secured against an asset. The eligibility for a personal loan depends on factors such as employment and credit history, repayment capacity, income level, etc. Availing of a personal loan is not only easy but also a preferred option, owing to reasons like less paperwork and the fact that there is no need for collateral to avail it.
What You Need to Know Before Taking a Personal Loan
While personal loans proffer many benefits, it’s also important to understand that defaulting on a personal loan can lead to adverse implications that could negatively affect your credit score. This, in turn, could lower your chances of getting a personal loan in the future.
You need to keep in mind that the interest rates on personal loans are much higher than those on other types of loans. This snowballing effect of the interest rates is simply because these collateral-free loans are sanctioned to the borrowers without any guarantee.
Personal loans can be used for any financial need of the individual. The lenders on their part will neither monitor nor restrict the end-use of the borrowed funds.
This can be beneficial for individuals to tide over the challenging times that were brought on by the pandemic. The Covid-19 pandemic also catapulted the popularity of personal loans leading to a surplus of personal loan options available in the market today. In times like these, choosing the right personal loan can be quite an uphill task. It’s become more important than ever for borrowers to carefully study the various lenders and the loan terms offered by lenders, to peg down on the personal loan that is most suitable for them.
To make things easy for you, here are the top 10 factors that you need to consider while looking out for the right personal loan.
10 Factors to Help You Choose the Right Personal Loan
Before you lock in on a specific personal loan, it is essential that you conduct detailed research. Here are the main things that you need to consider:
1. Loan amount
Prior to taking action on your decision to avail of a personal loan, one of the most critical factors involves deciding the loan amount that you wish to borrow.
Depending on the need for funds, it’s important that you fix the desired loan amount and then proceed to calculate the equated monthly installment (EMI) obligations based on the loan amount and the tenure for which you take the loan.
Comparing the loan offered by different lenders will help you settle for a more budget-friendly personal loan.
2. Loan repayment tenure
When you take a loan, it is advised that you repay the loan at the earliest possible time. That said, lenders that provide a short span for repayment would naturally demand higher EMIs, owing to the lesser number of installments.
Defaulting on loan repayment could leave a bad mark on your credit score, discouraging lenders from sanctioning loans to you in the future. So while you may be looking to become debt-free soon, it’s important to gauge your repayment capacity and go with a loan tenure that works best for you.
Personal loan happens to be the most common product that is offered by banks and financial institutions. More often than not, we’re flooded with calls and text messages offering us personal loans at attractive interest rates and terms.
With a plethora of options to choose from, selecting the right lender can be overwhelming, to say the least. In such cases, it’s crucial that you do your due diligence to avoid falling for fraudsters and into loan traps.
To make an informed decision, using an online aggregator platform would be the best choice. You can compare the various lenders, their terms, and interest rates and you will even be notified of the deals that these different lenders offer from time to time, on such platforms. If you’re looking for a long-term loan then you could consider going with an established bank that is offering favorable terms.
4. Credit score
A credit score or a CIBIL score is a key indicator of your eligibility for a personal loan. Before you take the step to avail of a personal loan, it’s important that you check your credit or CIBIL score.
While a higher score will increase your chances of getting a personal loan approved — the credit score also has an impact on the loan amount that is sanctioned, including the loan terms such as interest rate and EMIs.
The credit score reflects your overall financial health and gives the lender a better understanding of your debt repayment capabilities. A credit score that is above 750 is considered a good score to get a personal loan sanctioned on favorable terms.
5. Interest rates
You may have a myriad of lenders approach you with impressive and marginally low-interest rates. As alluring as this offer might be, bear in mind that when you opt for such low interest-rate loans, you may end up paying more due to many other unreasonable loan terms.
A comprehensive study and comparison of loan interest rates of different lenders are essential before you proceed to take a personal loan.
Another factor that you need to keep in mind is how the interest rates are calculated. Loan interest rates that are calculated using a reducing balance method are considered to be ideal in most cases.
6. EMI calculations
Before you take a loan, it is essential that you get accustomed to the process of EMI calculation.
Knowing this will help you understand your capacity to repay the loan on time. With options like no-cost EMI and advanced EMI in the market, having a clear understanding of how these EMIs are calculated is important to ensure that you avoid paying more than you have to.
7. Origination fees
Some lenders charge origination fees for personal loans. The origination fee is a fixed amount that needs to be paid once the loan application is sent to the lender or when the loan application has been verified.
Knowing the rates at which the origination fees are charged by different lenders, will help you make the right decision and steer clear of exorbitantly high origination fees.
8. Foreclosure and prepayment charges
Another set of fees that you need to be wary of is the foreclosure and prepayment charges. These are charges that come into the picture if the borrower plans to settle their loan before their loan tenure.
While some banks may choose not to charge any foreclosure fees, most banks charge anywhere between 2% and 5% of the balance amount.
Comparing these charges will help you pin down lenders who are offering the maximum flexibility when it comes to repayments, whether partial or in full.
9. Other charges
Besides the charges mentioned above, ensure that you do a thorough check of the loan terms for any other charges such as administrative charges, loan processing fees, etc.
Look up these charges on the lender’s website or on their loan application forms. Being well aware of all these additional fees and charges will help you know just how much you will be charged in the process of taking a personal loan.
10. Take your current liabilities into account
Before you apply for any loan, you need to take into consideration your existing debt and liabilities. There may be instances when you already have an ongoing loan that needs to be repaid or credit card bills that need to be settled. It’s important to consider these obligations and calculate your debt-to-income ratio.
This will further help you know if you have enough money to repay the loan. If your debt-to-income ratio is high, then you might want to examine other possibilities such as borrowing from your friends and family instead of taking a personal loan.
Keeping your financial goals in mind, you also may want to look at the credibility of the lender and the quality of their customer service before proceeding to apply for a personal loan.
While personal loans are available in plenty, settling for the right personal loan requires a good amount of research on the borrower’s part. Prior to applying for the loan, you need to carefully analyze all the pros and cons of different lenders, read the loan documents carefully and seal one that offers competitive interest rates along with flexible repayment options and a suitable tenure.