Personal loan is an unsecured credit option with minimal documentation and quicker disbursals, thus making it a preferred credit instrument for many consumers, especially during financial emergencies. However, opting for the right loan scheme from among the multiple personal loan options is not an easy task. Here are some points that you can consider for choosing the right personal loans:
Check personal loan offers from banks/NBFCs with whom you have deposit, credit card or loan accounts
Many lenders offer preferential interest rates on personal loans to their existing customers, depending on their credit profile. Individuals seeking personal loans should first contact their existing lenders, with whom they have deposit or lending relationships, to know if they are eligible for availing personal loans at preferential rates. Such customers can then use the personal loans offered by their existing lenders as a benchmark to compare the personal loans offered by other lenders. Moreover, approaching your existing lenders first would also help you know you are eligible for availing pre-approved personal loans. Lenders usually offer pre-approved personal loans, with minimal documentation and instant disbursal, to their existing customers provided they have a good credit profile
Consider and compare personal loan offers of other lenders
Once you know the personal loan interest rates and other features offered by your existing lender(s), visit online financial marketplaces to check and compare the personal loans offered by other lenders. Note that the personal loan interest rates may vary across lenders depending on your credit scores and other aspects of your credit profile such as employment profile, occupation, income profile, etc. Some banks/NBFCs also offer interest rate concessions on their personal loan schemes along with waivers in processing fees or other charges during festive seasons. Furthermore, the loan approval chances and final interest rates offered for a credit profile may vary from one personal loan lender to another based on their credit risk assessment policies.
Select loan tenure based on your repayment capacity
The repayment tenure of your personal loan affects both your EMIs and interest costs. Extending the loan tenure reduces your EMI but increases your interest costs. Shorter repayment tenures, on the other hand, increases your EMIs but reduces the overall interest cost. Therefore, prospective applicants should select their personal loan tenure based on their repayment capacity.
Lenders usually prefer approving personal loans of individuals whose monthly debt obligations, including the EMI of their proposed personal loan, is within 50 to 55% of their net monthly income. Banks/NBFCs usually reject personal loan applications of those exceeding the aforementioned limit or approve their loans at higher interest rates. To prevent this, personal loan applicants can select longer repayment tenures to reduce the EMIs of their proposed loan.
Processing fees and other charges
Besides interest rates, additional costs like processing fees, documentation fees, etc. can also inflate the total cost of availing personal loan. Lenders levy processing charges and/or login/administration fees to recover the cost incurred in processing loan applications. Processing fees usually vary from 0.5% to 4% of the personal loan amount. However, some personal loan lenders limit the processing fees regardless of the loan amount while some others waive them off during festive season or as a part of special offers.
Prepayment charges and conditions
The RBI has restricted banks from levying prepayment charges on floating interest rate personal loans. However, lenders are free to levy these charges in case of fixed rate personal loans. Many lenders also restrict their personal loan borrowers from partly prepaying or foreclosing their loans until they repay a fixed number of EMIs. Therefore, personal loan applicants planning to prepay/foreclose their loans in future should check the prepayment charges and related terms while comparing the personal loan offers of multiple lenders.
Loan disbursal time
Banks/NBFCs usually take up to 4 days for disbursing personal loan applications. However, lenders offering personal loans with 100% online onboarding process usually disburse the loan amount at a faster rate compared to personal loans availed through the offline channels. Those eligible for pre-approved personal loans may get loan disbursal instantly or within a few hours. Hence, prospective applicants planning to avail personal loans should see if the turnaround time for a loan is lower than the time within which they need the funds, before selecting a personal loan scheme.