One can avail a personal loan for umpteen reasons: to fund large purchases, consolidate debt, meet emergency expenses, and much more. Typically, a personal loan can be repaid in equated monthly instalments (EMI) over two to five years; however, this tenure is flexible as per your comfort. While a personal loan is not the only financial solution available, it is often the most viable option because it is less expensive than other options like a credit card, and disbursement is faster and convenient than a loan against property. One should remember that personal loans are collateral-free, so lending institutions thoroughly check borrowers’ profiles on criteria such as income, credit score, age, and employment history.
Personal loans can be used for practically any need and here are the top five aspects to consider before you choose one.
Five factors to look into before app
lying for a personal loan
- Loan Amount and Tenure: Before applying for a personal loan, the most critical factor is to know the amount you need to borrow. Calculating the amount you need and comparing it to what you can repay easily will be key. Using various tenure options with the proposed loan amount to calculate the EMI obligation is a smart way to reach a budget-friendly proposition. A loan with a longer tenure means lower EMIs but also an increased interest obligation.
- Rate of Interest and Other Charges: After you have decided on the amount you want to borrow, you must check out the most crucial factor that determines the total cost of your loan – the interest rate. This interest rate is based on several factors like your income, your creditworthiness, the company you work for, etc. A difference of even half a percentage in the rate of interest can significantly affect your loan cost. If planned well, a lower interest rate can translate into lower EMIs and, consequently, a shorter loan tenure. Additionally, there could be other charges that the lending institution might levy on a borrower, such as processing fees or penalties applicable on late payment or default.
- Credit Score: As mentioned above, your credit score is a major determinant of your eligibility. A credit score or CIBIL score is a 3-digit number ranging from 300 to 900 that speaks for the borrower’s creditworthiness. It mirrors the overall financial health of the borrower in terms of disposable income, existing loans, borrowing and repayment behaviour/history. The higher your CIBIL score, the better are your chances of personal loan approval. In addition, the sanctioned loan amount and the loan terms depend greatly on your CIBIL score. A CIBIL score over 750 is considered excellent to apply for a personal loan with favourable terms.
- Pre-/Part-Payment facility and charges: There can be a situation when you need a personal loan immediately but you know that you might soon have enough funds to pay it back. Firstly, if the pre-payment can be done in full relatively early into the loan tenure, you can save a lot on the interest. A personal loan generally has a lock-in period, only after which, the entire outstanding amount can be prepaid at a nominal charge.
To illustrate, for a personal loan of ₹2 lakhs, borrowed at an interest rate of 15% for a term of five years, the EMI comes to ₹4,758. Thus, at the end of the first year, you would have paid ₹29,040 towards the principal and ₹28,056 in interest. If you decide to prepay the total outstanding amount in full at this point, you will save ₹57,423 in interest payments. Do remember to inquire about prepayment/foreclosure charges with the lender.
If you do not have the funds to make the total pre-payment, you can make a part payment. Part-payment works because it brings down the principal amount, thereby reducing the interest paid on the loan. This, in turn, can bring down your EMI. In case you go for a ₹3 lakh personal loan for a term of 5 years at a 15% rate of interest, you would have to pay an extra interest of ₹1,28,219. In case you make a nominal part payment of ₹50,000/- after the sixth EMI, you would be able to save about 30% of your interest portion.
- Income vis-à-vis monthly EMI: It is no surprise that you will have to repay the amount you borrow on a monthly basis, in the form of an EMI. Hence, before taking a personal loan, you should analyse your cash flow and expenditures as well as financial obligations. Your monthly income should accommodate your monthly EMI along with your regular expenses without straining your finances. To put it more simply, your EMI obligations should not exceed 40% of your total disposable income.
Where to look for a personal loan?
Once you have decided that you need a personal loan, make sure you go ahead with a trusted financial partner. You may come across loan offers with unusually low interest rates. However, when you read the fine print, you will realise that there are other hidden charges like a processing fee or a high pre-payment penalty if you try to repay the loan ahead of the schedule.
If you are looking for a transparent and hassle-free personal loan application experience, you will find that Finserv markets checks all the right boxes. In addition, they have a wide range of partners on-boarded, which makes them an effective marketplace to visit for multiple loan options. With personal loan offerings of up to ₹25 lakh at low and attractive interest rates, you can easily meet your financial requirements in one place. Moreover, the Bajaj Finserv Hybrid Flexi Loan available on Finserv MARKETS comes with zero prepayment charges. To compute the estimated EMI on the personal loan, all you need to do is input the loan details on this
Personal Loan EMI Calculator
, and voilà, you are good to go!