Loans have become a standard solution for many Indian households to meet planned and unforeseen expenses. While it is not uncommon for middle-class families to opt for loans for needs like home renovations, weddings, or education. Young professionals are also choosing personal loan to pursue interests like adventure travel.
A personal loan is an unsecured loan given by banks, NBFCs, or fintech firms solely based on your income and creditworthiness—without needing to pledge any asset or collateral. The funds from a personal loan can be used for any legal purpose without restrictions, which is what makes it a popular financing tool.
Things to Consider When Choosing Personal Loan
Understand the critical factors in choosing personal loan. Equip yourself with knowledge to navigate the lending landscape and make wise financial choices.
Loan Amount and Tenure
Most lenders offer loans between Rs 50,000 and Rs 40 lakh that must be repaid over 1 to 5 years. Factors like income, credit score, age, existing obligations, and lender policy decide the loan amount and maximum tenure offered.
Opting for lower loan amounts and shorter tenure leads to lower outflows towards interest and faster loan closure. Make sure your income is adequate to support the EMIs over the entire tenure without payment issues. Otherwise, financial discipline can be a toss-up.
Interest Rates
Interest is a significant outflow factor. Compare interest rates offered across lenders before zeroing in on the lender offering the lowest rates. Currently, rates between 10.5% and 24% are charged for personal loans. Online lenders and fintech firms offer more competitive rates than traditional banks.
Also, look at the Annual Percentage Rate (APR) or effective interest rate, which includes the personal loan interest and all other charges like processing fees. A lower APR signifies lower outflows.
Fees and Charges
In addition to interest costs, lenders levy processing fees of up to 2-3 % of the loan amount. Foreclosure charges, prepayment penalties, cheque bounce charges, etc., may also apply in certain situations. Read all terms and conditions carefully to avoid surprise charges that could derail your loan repayment.
Flexibility of Repayment
Evaluate options for increasing or decreasing your EMIs in case of changes in income during the tenure due to job switches or other factors. Some lenders allow you to entirely foreclose or prepay the loan without attracting charges, which helps shorten tenure. Added repayment flexibility always helps.
Disbursement Time
Online lenders like digital lending apps disburse small-ticket personal loans of up to Rs 2 lakh in 10-15 minutes, making them ideal for medical or other emergencies. However, for larger personal loans, you may need to opt for traditional lenders despite the longer processing time of up to 2 weeks.
Eligibility and Documents Needed
Each lender outlines minimum eligibility criteria such as age, income level, employment stability, credit score, etc. Those satisfying the norms have the best chance for speedy approval. Only apply with lenders where eligibility conditions can be met. Also, check beforehand what documents will be needed to arrange them in advance. Delays in submitting papers lead to delays in approval.
The Bottom Line
By evaluating the above key parameters across 2-3 leading lending options for personal loans, you can identify the ideal lender and loan product matching your unique needs and circumstances. A little diligence in the initial stages translates to substantial savings and prudent borrowing. Think through your choice carefully before taking the plunge.
