Every bank and financial institution sends messages and adverts to encourage you to take a personal loan. Most people take personal loans for funding their children’s education, travel, home improvements, or meeting temporary finance needs.
Selecting a personal loan that matches your needs can be tricky. Let’s understand the key factors involved in selecting such a loan.
Understanding your own needs
It is important to be clear about the reason for procuring a personal loan and your financial status. You should refrain from borrowing more than what you need as this impacts your credit score in the long run.
Market standing and reputation of the lender
There are different lenders that offer personal loan products – banks, financial institutions, and NBFCs. Choose a lender that has a good market standing in terms of granting and execution of loan products. This smoothens the entire process of selecting the most suitable loan product and the documentation that follows. Further, reputed lenders guide you through the period of the loan and ensure the smooth closure of the loan account after all repayments.
Quantum of the loan
Certain lenders may have a cap on the amount of personal loan they can grant you based on your credit score, regular income or their own internal policies. If you require a higher loan amount, choose a lender that grants that amount and does not have a cap.
One of the deciding factors in procuring a personal loan is the interest rate. The lender sets its interest rate based on the market dynamics and may alter it to accommodate individual factors like your financial status and the CIBIL score. It directly affects the amount of interest you pay and the overall interest cost of the loan. Typically, individuals having a good credit score are offered lower interest rates compared to those with a lower credit score. While getting low-interest rates is important, one should always check the credibility of the lender before taking a personal loan.
Processing fees and other charges
Besides the interest rate, you must also check the quantum of processing fees levied, foreclosure charges, and any other charges before deciding on a personal loan product. These aspects are often written in fine print and may not be informed to you in advance. Hence, you must inquire about additional fees and charges before procuring the loan and understand how they are calculated. This would ensure that you are aware of the total cost of the loan well in advance.
Read the fine print cautiously
Generally, borrowers tend to rely on the lender and do not read all the pages of the agreement. It is important to read the offer documents very carefully and to completely understand all the terms and conditions relating to your personal loan. If you have any doubts, it is best to clear them immediately with your lender.
Various aspects like the cost of prepayment or foreclosure of the loan and one-time costs to be levied at the time of lending should be known to you.
Likewise, the manner of interest calculation should also be transparent. Compound interest is the 8th wonder of the world. Hence, you should be aware of how the interest is calculated on your loan amount.
You must also inquire about other aspects like the consequences of failure to repay on time or on the demise of the borrower.
Doing some market research and using the above criteria to understand your loan product thoroughly provides financial certainty. It can also avoid unexpected shocks in the long run. A personal loan EMI calculator can help you compare different loan products and select the one that is suitable for you.