6 Easy Tips to Choose Right Personal Loan for You

Personal loans are one of the most preferred loan option because of their quicker loan disbursal, minimum documentation, absence of end-use restrictions on loan proceeds, and non-requirement of margin or collateral. However, with scores of banks and NBFCs offering personal loans with widely varying interest rates based on the applicants’ monthly incomes, job profiles, credit scores, employer’s profile, etc, choosing the optimum personal loan can be a difficult task for many.

Here, we have laid down some tips for choosing the right personal loan:

Check with banks and NBFCs with which you have deposit, loan or credit card accounts

Most banks and NBFCs offer preferential interest rates to their existing customers. Therefore, those looking for personal loans should first start their search by approaching the bank and/or NBFC with which they already have a deposit and/or lending relationship. Their interest rates and other loan features can therefore be used as a benchmark against which interest rates offered by other lenders can be compared.

Compare interest rates offered by other lenders

Before applying for a personal loan, the applicant should compare personal loan interest rates offered by various lenders. Lenders offer different interest rates to different customers depending on various factors such as credit score, employer’s profile and monthly income of an applicant. Some lenders also run special interest rates offers during the festive season.

The applicants having credit scores of 750 and above have higher chances of loan approval and can fetch lower interest rate. Those with poor credit scores are either charged with higher interest rate or their loan applications can get rejected.Thus, ensure to maintain a strong credit score by following healthy credit practices like repaying credit card bills on their due dates, avoiding multiple loan or credit card applications within a short duration, restricting credit utilization ratio within 30%, maintaining a healthy credit mix and fetching your credit report at regular intervals.

Personal Loan Interest Rates &Processing Fees and Charges Offered by Top Banks in India

Compare processing fees and other charges

The applicant should be aware that low personal loan interest rates do not necessarily mean that it’s the right personal loan for you. It may carry additional charges which can increase the cost of borrowing. These include processing charges, penal interest, cheque bounce charges, overdue EMI interest, foreclosure charges, stamp duty charges and other fees.

The processing fee is a major expense as it ranges from 0.5% to 4% of the loan amount.However, some NBFCs, banks and fintech companies waive off processing fees during special festive offers while some put a cap on the processing fee amount, irrespective of the loan amount.

Prepayment Charges

Also before locking to a lender, borrower should check foreclosure fees. RBI regulations have barred banks from levying foreclosure charges on floating interest rates. Charging foreclosure fees on fixed interest rates are at the discretion of the lender. Some banks/NBFCs do not allow foreclosure of the loan account until the repayment of a pre-determined number of EMIs.

Check the turnaround time for disbursal

Disbursal of loan depends on various factors such as loan agreement, type of loan, upfront payment and processing fees. Some banks offer pre-approved personal loans with instant disbursal to its existing customers having good credit profile. Lenders offering end to end digital onboarding also tend to have quicker disbursal than personal loans offered through offline channels. Therefore, assessing the approval and disbursal time period is critical as it helps to meet financial objectives as early as possible. Hence, opt for the lender who has faster disbursal process.

Choose your tenure according to repayment capacity

Opting for a longer repayment tenure reduces the EMI burden but increases the total cost of the loan as it leads to higher interest cost. The situation is inversely proportional if a borrower opts for shorter tenure. Hence, the applicant should choose his tenure primarily on the basis of his repayment capacity. However, the borrower should not sacrifice his monthly contributions or existing investments meant for achievingessential financial goals for making higher EMI payments. Note that lenders prefer to lend to personal loan applicants whose monthly repayment obligations, including that of the proposed personal loan, does not exceed 55-60% of their monthly income.