How to choose the right personal loan? Here are 7 key ways

A personal loan is one of the quickest ways to arrange funds for any reason. Be it a medical emergency, paying for a child’s education, a family function, buying a vehicle, enjoying a family vacation, starting a business, etc. In the case of a personal loan, you don’t need to tell the bank about the end use of funds. 

There are many banks, NBFCs, fintechs, etc., that offer personal loans. However, when applying for a personal loan, you must ensure to choose the right one. In this article, we will understand the factors you must consider to ensure you choose the right personal loan.

Factors to consider for choosing the right personal loan

The loan amount should be neither too high nor too low

If the personal loan amount is higher than required, you will pay a higher amount of interest than required. However, if the loan amount is lower than required, you will fall short of funds for the intended purpose. Hence, you must ensure the loan amount is just right.

If taking a loan for a purpose like paying education fees, buying a vehicle, etc., as the amount is known, you can be sure of the loan amount. However, for purposes like a medical emergency, family function, starting a business, family vacation, etc., assess the funds requirement carefully. Discuss with your family members to arrive at the required personal loan amount.

Compare the interest rate and other terms from various lenders

Once you decide on the loan amount, compare the personal loan offers from various banks and NBFCs. One of the important parameters to compare is the interest rate. There are many online platforms that can help you compare personal loan offers from banks on various parameters like interest rates, tenure, income criteria and others.

Some banks may reduce the interest rate based on high credit score, existing relationship with the bank, if you are working with a reputed company with whom they have a tie-up, etc. The personal loan interest rates are usually in the range between 10% to 20% p.a. With such a wide range, it is important to compare and choose the one that suits your requirements.

Check the processing fee, foreclosure charges, and other charges

In the above section, we saw how comparing the personal loan interest rates among banks and NBFCs is essential. Similarly, it is important to compare the various fees and charges for personal loans among various banks and NBFCs.

In a personal loan, after the interest charges, the processing fee is one of the major costs involved. The processing fee can be a flat amount or a percentage of the loan amount. The processing fee is usually in the range between 1% to 4% of the loan amount. Some banks may charge a percentage of the loan amount, subject to a minimum and maximum processing fee.

The other fees and charges in a personal loan include foreclosure fees, late payment fees, EMI dishonour/bounce charges, loan cancellation charges, etc. The foreclosure fee is usually in the range between 1% to 4% of the outstanding principal amount. Some lenders may waive the foreclosure fee if the loan is closed after paying a specified number of EMIs. For example, a lender may waive the foreclosure fee after 12 EMIs have been paid.

As the fees can form a considerable amount, it is better to compare the processing fee, foreclosure fee, and other charges among various banks and NBFCs. While comparing, choose a lender that offers favourable terms that suit your needs.

Choose the repayment schedule that suits your repayment capacity

Usually, personal loans have a tenure of 12 to 60 months. Choose a repayment schedule that suits your repayment capacity. If you choose a longer tenure, you will pay more interest amount than needed. If you choose a shorter tenure, it can put pressure on your cash flows.

To understand your repayment capacity, prepare a cash flow statement. On the left side, list all the income sources like salary/business income, rent, interest income, dividend, etc. On the right side, list all the expenses. Take the total income and deduct the expenses. The balance left is your free cash flow, which can be used for the EMI repayment. Accordingly, you can choose the repayment schedule and EMI, such that it is easy on your pocket.

Ensure minimal documentation with a complete online process

These days, most banks and NBFCs have automated the process for personal loans and other loans. In some cases, the entire personal loan process, from application to disbursement, is automated. Check if the bank or NBFC you have shortlisted has an online option for applying for a personal loan. The digital process makes it fast, easy, and convenient. It can be done from the comfort of your home/office without the need to visit the bank branch.

The online verification of KYC documents ensures you don’t have to submit physical copies. Some banks have online processes that ensure you get the loan amount in a few minutes, hours, or on the same day. A faster process comes in handy in emergency situations such as a medical emergency.

Read customer reviews about the lender

Once you finalise a couple of lenders, spend some time reading their customer reviews. Check online forums to see how their customers have rated them. Talk to family members, relatives, friends, colleagues, etc., to understand whether they have dealt with the bank in the past and how was their experience.

Choosing the right personal loan will give the much-needed peace of mind

As discussed earlier, there can be various reasons for which an individual may need a personal loan. If it is for a medical emergency, the time in which the loan is disbursed is important. If it is for a family vacation, getting the loan on good terms is important, else it can ruin your vacation. 

So, whatever your reason for taking a personal loan, you must ensure to choose the right personal loan. The factors and the steps discussed in the above article will help you choose the right personal loan, which will give you the much-needed peace of mind.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.