A step-by-step guide to choosing the best personal loan. Read on to learn how to compare different loan options and how to increase your chances of loan approval.
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Table of contents:
- Factors to consider while choosing a loan
- Documents needed for a personal loan
- How to improve your chances of getting a loan approved
Are you in need of some extra cash to cover an unexpected expense? Do you need financial support to fund a large purchase? If so, a personal loan could be just the solution you need! However, in the age of online and instant personal loans, choosing the best personal loan can be a task. You may not know where to begin, how to compare different lenders and choose the most cost-efficient option.
Fret not! This article will help you do all that and more.
A personal loan is a type of loan that you can take from a bank, financial institution, or an online lender to borrow money for any personal need. You can use this money for things like paying for a wedding, renovating your house, going on a vacation, or even paying off an existing debt.
Unlike a home loan or car loan, a personal loan is an unsecured loan, which means that you do not have to provide any collateral to the lender. Instead, the lender will check your *creditworthiness before deciding to give you the loan.
* Creditworthiness is a person’s ability to borrow and repay the money. Lenders assess your creditworthiness by taking into account various factors such as your credit score, income, debt-to-income ratio, employment history, and any other outstanding debts or liabilities.
Before taking a loan, you must compare the following factors and find the best personal loan option available for you.
This is the amount charged over and above the loan principal amount. When you take a loan, you have to pay back the borrowed amount with interest. There are two types of Personal Loan interest rates: floating interest rate & fixed interest rate. Floating interest is generally lower than fixed interest, but it may change over the loan tenure, depending on market conditions. With lower interest rates, the loan becomes easy on your pocket.
Besides interest rates, pay attention to any fees associated with the loan. Learn about the extra fees/charges levied by lenders below and factor them into your decision.
a. Processing Fee: When a lender issues a Personal Loan, they bear some administrative cost to sanction it. This one-time cost is passed on to the borrower as a processing fee. It is usually a percentage of the loan amount, typically 1% to 3%. However, some banks have capped the processing fee amount, irrespective of the loan amount.
b. Pre-payment/ Foreclosure Charges: When a borrower wants to pay off a part of the Personal Loan amount in advance, earlier than the agreed loan tenure, they must pay an early pay-off fee. This is called a pre-payment charge.
Foreclosure is when the borrower decides to pay back the loan amount in full before the end of the loan tenure. In such cases, you are charged a foreclosure fee.
Note* According to a guideline issued by the RBI on August 2nd, 2019, banks and NBFCs must eliminate foreclosure/prepayment penalties on floating interest rate term loans given to individual borrowers for non-business purposes. Therefore, borrowers must confirm that the lender has not included any prepayment penalties or foreclosure charges.
c. Loan Cancellation Charges: If you cancel your loan application after approval, you will have to pay loan cancellation charges.
d. Cheque Dishonor Charges: If a cheque deposited by you bounces, lenders may charge a cheque dishonor fee. Some lenders may charge higher fees for repeated instances of cheque dishonor. Ensure you have sufficient funds before writing a cheque for your EMIs.
The repayments will determine how much the borrower will pay each month, the duration of the loan, and the total amount of interest that will be paid over the life of the loan. Below are the repayment criteria that one should look at before applying for a personal loan.
• Repayment Terms: Repayment terms of a loan are listed in the loan document. This refers to the terms and conditions for paying back the money you borrowed in a personal loan. These conditions include interest rate, loan tenure, and how often you must repay.
• Repayment Options: Some lenders offer flexible repayment options, such as making biweekly payments or paying extra toward the principal. These options can help you repay the loan faster and save on interest. You can use the Personal Loan EMI calculator in the OneScore app, to better plan your payments.
The length of the loan term can affect your monthly payment and the total amount you’ll pay in interest. Consider what you can afford each month and how quickly you want to pay off the loan when choosing a loan term.
You can get a personal loan at banks, credit unions, and online lenders. Peer-to-peer loans are another option you can consider. If your credit score has taken a hit, you may approach private lenders who generally offer small loans at higher interest rates.
Also read: How to get a loan with a low credit score
You will need to provide the following documents:
• Proof of identity Passport, driver’s license, or national ID card.
• Proof of income Two latest salary slip certificates with the latest Form 16. If you are self-employed, you require proof showing how much profit was made each year since starting the business (for example, last year’s tax return).
• Bank Statement. Provide your bank statement for the past three months or your passbook for the past six months.
1. Check your credit score before applying for a loan
2. Don’t apply for multiple credit products (loans, credit cards) at once
3. Take Debt-to-income (DTI) ratio into consideration
4. Make sure you include all your income sources
5. Apply for an amount you can afford to pay back
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The ultimate guide to getting a personal loan at the most favourable interest rates
- OneScore , April 19, 2023