A personal loan can be a life-saver. It funds you during an urgent cash requirement. However, before borrowing, one must assess the terms and conditions of the loan – what the loan costs, what the tenure is, what the late payment fine is, and so on.
To get the ideal deal on a personal loan, make sure to keep these factors in mind.
Assessing Credit Score Prior to Application
Most financial institutions check a borrower’s credit score when assessing their creditworthiness and repayment capacity. They also only vet individuals with a certain income level before considering an application. There is a possibility for an application to be rejected on account of a poor or average score. Since your credit score changes every month, it is wise to get it keep a tab on it before applying for a loan. Just Google for “free credit report” and get yours for free in two minutes.
Interest Rate and Tenure
Personal loan interest rates are typically higher than other loan products such as home loans. This is because firstly they are given without any guarantor in most cases. It’s an unsecured loan where no security needs to be pledged to the lender.
Banks can charge anywhere between 11 per cent and 16 per cent on an average, whereas NBFCs and financial institutions may charge a higher rate. So make sure to work out the rates and given that these floating rates factor in around 2 per cent to 3 per cent rate fluctuations.
The interest rate and tenure can impact the size of the EMI. A longer tenure means easier EMIs; a shorter one means lower interest payments. A good credit score can also ensure you get an attractive interest rate.
Most often we ignore such charges thinking them to be paltry. But these costs can escalate with the size of the loan. Check the same as well as other associated charges like GST, one-time fee and more.
Late Payment Charges
Delayed payment of EMIs or rejection of ECS for insufficient balance may prove to be rather costly in cases of personal loans. Some NBFCs and banks have rather high charges for late payment, sometimes as much as 5 per cent to 10 per cent of the EMI. Plus on an ECS rejection the source account’s bank will also charge you for the default.
Pre-Payment and Foreclosure Charges
Most people opt for personal loans due to urgent money requirements, which means they may be capable of paying back large portions of the loan in due time. So it’s wise to check whether the said loan gives you the option to pre-pay or pre-close to reduce your liability. Some lenders charge a fee for pre-payment or pre-closure. Others may allow it at no cost; however, you may have to pay a higher interest rate.