Business Other News 25 Apr 2019 Want to apply for pe ...

Want to apply for personal loan? consider these 5 factors

Published Apr 25, 2019, 3:27 pm IST
Updated Apr 25, 2019, 4:05 pm IST
The loan has certain implications on your financial future, you must exercise some caution when applying for it.
 The loan has certain implications on your financial future, you must exercise some caution when applying for it.

Personal loan is one of the most preferred credit option for those in immediate need of finance, as it comes with zero collateral or security, minimum paperwork and quick disbursal. The best part is that it can be used for any purpose like renovation, higher studies, vacation, wedding, medical emergencies etc. However, since the loan has certain implications on your financial future, you must exercise some caution when applying for it. Mentioned below are 5 factors you must consider before taking a personal loan:

Credit Profile

Since personal loan is unsecured in nature, lenders carefully scrutinise your credit report which includes all the details of your credit history relating to your credit cards and loans. Applicants with credit score of 750 and above may get instant loan approval while those with lower score may not or may get loan at higher interest rate. Unlike secured loans (car loan, home loan, loan against property etc.), where the value of the collateral becomes crucial element in determining your credibility, credit score is the most vital component in case of personal loan. Credit score shows your credibility as a borrower and helps lenders in deciding the associated risk involved in lending.

Hence, it is necessary to keep track of your credit score at periodic intervals as it can assist in building a good credit history by detecting bad credit behaviour and discrepancies. Also, when you apply for a personal loan, avoid applying with multiple lenders. Each application is recorded in the credit report as hard enquiry for which the bureaus lower few points of your credit score. Submitting multiple enquiries in a short time span can be morbid as it can significantly lower your credit score.  

Rate of Interest

As the interest rate for personal loan is determined on basis of the lender’s assessment of your risk profile, hence it may vary between 10.60 per cent and 24 per cent. To assess your risk profile, the lenders factor in your credit worthiness, income, age, employer, credit score etc. Therefore, before applying for a personal loan, ensure to compare the rate of interest offered by other lenders to you.

Loan Tenure

The repayment tenure for personal loan generally varies between 1 and 5 years. However, some lenders may allow a longer tenure of up to 6 years. While lower tenure means higher loan EMI, it also leads to lower interest cost and vice versa. As a borrower you must keep your EMI at a comfortable and manageable level without burdening your finances. If you can afford to repay and close the loan faster, then you must opt for shorter tenure. This helps you to save on the interest cost. However, if you want to repay the loan without stressing much on your finances, then you may opt for higher tenure.

Processing Fee

Processing fee refers to the expenses incurred by lenders when processing your loan application which includes administrative charge, cost of credit checks etc. It usually ranges between 0.5 per cent and 3 per cent of the loan amount. Some lenders may charge a flat fee. Before zeroing on a lender, make sure to check this fee as in case of big-ticket loans it may be a sizeable amount.

Prepayment and Foreclosure Charges

The lenders may charge you a penalty when you prepay your personal loan, whether in part or full during the loan tenure. Generally, prepayment/foreclosure charges range between nil and 5 per cent of the principal outstanding and is permitted only after the completion of certain period in your loan tenure. By prepaying personal loan, you tend to save on the interest cost. If you are planning to prepay your loan, ensure you choose the lender charging minimal prepayment/foreclosure penalty.

By Gaurav Aggarwal - Head of Unsecured Loans -

Location: India, Delhi, New Delhi


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