Speedy loan disbursal, no restrictions on end-usage of loan proceeds, minimal documentation and no requirement of collaterals or margin amount make personal loans a preferred option for customers facing financial shortfalls. The personal loan features like interest rates, tenures, processing fee, etc. can vary widely depending on the lender and the credit profile of the loan applicants, implying varying implications on their financial health.
Here are some factors that would influence the personal loan features offered to you.
Interest Rate
Personal loan interest rates can differ widely across lenders depending on their own cost of funds and credit risk assessment of a loan applicant’s credit profile. The interest rate for personal loans usually start from around 10.25% p.a. onwards, with some public sector banks offering personal loans at lower interest rates. However, the personal loan interest rates offered to loan applicants would depend on factors like their monthly income, creditworthiness, age, occupation profile, employer’s profile (if employed), etc. Thus, loan applicants should compare the interest rates offered by multiple banks and NBFCsbefore applying for a personal loan.
As many lenders provide interest rate concessions on personal loans to their existing customers, personal loan applicants should first approach banks and NBFCs with whom they already have deposit or lending relationships. They should also visit online financial marketplaces to compare the personal loan offers available from other lenders based on their credit profiles.
Loan Tenure
Lenders usually offer loan tenures of up to 5 years for personal loans, with some lenders providing longer tenures of up to 7 years. Loan applicants can opt for a longer tenure to lower their EMIs but it increases their interest cost. The reverse is true for personal loans having a lower interest cost. Hence, loan applicants preferring lower EMIs due to their restricted repayment capacity can opt for extended personal loan tenures while applicants who wish to repay and close the loans at a faster rate should go for shorter tenures. However, applicants should avoid using their emergency fund or foregoing their contributions towards achieving their financial goals in the pursuit of repaying higher EMIs.
Processing Fee
Lenders usually charge processing fees of up to 3% of the loan amount. Some lenders charge a flat processing fee while many others may either waive off the processing fee or offer attractive concessions on it during the festive season. Hence, those planning to apply for personal loan should ensure to compare the processing fees of multiple banks and NBFCs.
Prepayment/Foreclosure Charges
Personal loan borrowers can reduce their interest cost by making loan prepayments. RBI has barred the lenders from charging prepayment fees on personal loans and other retail loans lent on floating interest rates. However, lenders offering personal loans on fixed interest rates are free to charge prepayment fees on loan prepayment/foreclosure. Some lenders also prohibit their existing personal loan borrowers from making part-prepayment or foreclosing their loans before they repay a predetermined number of EMIs. Hence, loan applicants planning to keep the prepayment facility open should prefer personal loans offered at floating interest rates.
Credit Score
Lenders place higher weightage on the credit scores of personal loan applicants compared to secured loans as personal loans are not backed by any collateral. This has made credit score as one of the most crucial eligibility criteria for personal loan applicants. Personal loan applicants with credit scores of 750 and above usually have higher chances for loan approval. Some banks and NBFCs may also factor in credit scores while setting the personal loan interest rates of their loan applicants. Many lenders also provide personal loans at lower interest rates to loan applicants with higher credit scores. Hence, those planning to avail personal loans should regularly fetch their credit reports. This would allow them to take corrective steps, if required, for improving their credit score.
Loan applicants who want to compare personal loans offered by multiple banks and NBFCs should avoid making enquiries with those lenders within a short span of time. Any loan enquiry made directly with a lender is considered as a hard enquiry. Every hard enquiry reduces the credit score of a loan applicant by a few points. Hence, making multiple hard enquiries within a short span of time can result in a drastic reduction in their credit score and thereby, reduce their chances of personal loan approval. Instead, loan applicants can visit online financial marketplaces like paisabazaar.com to compare personal loan offers from multiple lenders. While online financial marketplaces can also fetch credit reports of an applicant, such report requests are considered as soft enquiries. Hence, loan applicants can make multiple soft enquiries without having to worry about any negative impact on their credit score.
CAclubindia
