As an unsecured loan, personal loans carry a very high rate of interest. Therefore, you should only consider taking out a personal loan if:
- You don’t have any asset / collateral that you can get a loan against. For example, if you have a FD that you can pledge, a secured loan might make more sense.
- You have some visibility into your cash flow and are confident that you will be able to repay Equivalent Monthly Payments on time. Otherwise, you risk falling into the debt trap.
- There is an emergency and you need the funds immediately. You can take out a personal loan because the processing time is much less due to the minimum documentation.
Opt in for a loan only to meet your basic needs which cannot wait should be your last resort. Taking it for leisure purposes can be costly, i.e. to gamble, buy a new car (a car loan is a better bet with less interest), etc.
Before choosing your personal loan:
Calculate the cheapest loan offer: These loans have very high interest rates ranging from 14% to 25%. Compare interest rates and get the full picture by including the annualized interest rates for each offer. Then calculate the total repayment amount that you have to pay with all the offers before opting for the loan of your choice.
Processing and Other Fees: You should be aware of the processing fees and other fees that will be charged when you apply for your personal loan.
Prepayment Penalty Check: Ask in advance if there will be any prepayment penalty at any given time. Most of the time, loan consumers tend to pay off their loans earlier than expected to get rid of their debts. Therefore, it is important to know if your personal loan offer allows for partial prepayments. If so, you need to know within what time frame of the loan period you can start prepaying and understand the cost you will incur due to these prepayments in part or in full.
Evaluate all loan offers: The first condition for selecting loan offers is the total outflow of money that the loan will cost. The second factor is the EMI. A loan offer with a lower EMI and a longer duration may seem attractive because it could be easy on your wallet; however, not all of these loans are profitable in the long run. So, calculate the total cost of the loan first, then try to go for a higher IME, which you can easily manage to allow for a shorter loan term.
Track Your Credit History: Especially in the case of unsecured loans, your credit history, which is recorded by CIBIL (Credit Bureau India Limited), plays a vital role in getting your loan application accepted. A good repayment history guarantees immediate loan approval, but the brownie tip is in the form of more attractive interest rates.
Who is eligible for a personal loan?
The eligibility criteria and their specific details may differ from bank to bank depending on their perception of the risks associated with these loans. However, almost all banks divide potential borrowers into three categories:
Other factors taken into account are age, residence, professional experience, repayment capacity, past obligations and place of work.
What documents are required for personal loan?
Personal loan requires the fewest documents, so they are the fastest to get approved. Usually, financial institutions require proof of identity, residence, income and also 3-6 months of your bank statements. Some banks also require guarantors and the same set of documents.