Personal loans are indeed a boon if you are in need of money to address emergency expenses. While you can use personal loans for several other purposes ranging from travel and education to grand celebrations, it really is not recommended as these loans are by no means cheap.
With several personal loan products being actively promoted, choosing the right one is not going to be easy. Ascertain your needs before you start looking for a personal loan. You must then narrow your choice to a few relevant deals from reputed lenders and further compare them carefully to pick a personal loan that suits your needs and repayment capacity.
There are several aspects of a personal loan that you may have to compare in order to find a suitable product. These include but not limited to:
- Loan Amount
- Interest Rate
- Easy/Equated Monthly Instalment (EMI)
- Loan Tenure
- Charges and Fees
- Repayment Options
Most important among them are the interest rate, total costs, flexibility / repayments and the EMI.
The same aspects are relevant even when applying for a personal loan top up to request for additional funds. For instance if you have taken a personal loan from ICICI Bank, you can apply for a ICICI top up personal loan in case you still need more money. Top-up loan applications also attract processing fees unless there are specific exceptions. You can also use the ICICI top up personal loan to consolidate the existing loan and additional requirement into a new loan as well.
Why should you compare interest rates when selecting a personal loan?
The Interest that you pay on a personal loan is really hefty and demands all your attention. Ranging from 11% upwards, interest rates on personal loans are usually steep so that they can cover the risks associated with unsecure loans.
While it is always logical to go for a loan with lower interest rate, you may land up paying far more than the actual loan amount, if the loan term is a longer one.
Interest rate can either be fixed or variable (based on the outstanding loan amount). With a fixed interest rate, you can plan for monthly repayments knowing exactly how much EMI you will be paying each month.
A variable interest based on reducing loan balance can make EMIs more affordable but variable rates are subject to periodic changes as well.
Interest rates on top-up personal loans are likely to be up to 1% higher than the regular personal loans.
What are the Charges and Fees applicable on a personal loan?
Remember that a low interest rate may not necessarily mean that your loan is affordable or cheap. There are certain standard fees and charges that are applied on a personal loan and these can be quite significant depending on the loan amount you plan to avail. In addition to paying the interest and the borrowed amount, you will have to pay these extra fees, some of which are one-time.
Typically you will be paying a processing fee to get your loan application processed. The proof documents you submit, your credit history and other details will be verified before the loan is sanctioned. Lenders either charge a fixed amount or a percentage of the loan amount as processing fees. Charges may go up to 2% of the loan amount.
You will also be charged a penalty if you fail to pay your monthly EMIs on time or default on the payments. The penalty charges are bound to differ across lenders.
While not exactly a charge or a fee, some lenders/banks may ask you to purchase an insurance policy to cover for the personal loan as the loan is not backed by collateral. In such cases, you must include the cost of insurance as well when working out the total cost of the loan.
Trying to pay off the loan earlier too is bound to attract a significant penalty.
Does the personal loan product allow for Flexibility?
Flexibility in this case simply means options or choices you get when honoring your loan. It can be as simple as allowing EMI payments via post-dated cheques or auto debits from your bank account or more serious as allowing you to repay your loan partly or fully if at all you can afford to do so.
Debt is a heavy financial burden and you must be able to get rid of it as early as possible. It is therefore better to opt for a personal loan product that allows you to make a bulk payment either in part or full to offset the loan partially or fully earlier than the agreed loan tenure.
Both Prepayments (partial settlements) and Foreclosures (full settlement) if permitted attract a penalty ranging around 2-5% of the outstanding loan amount. It is also very much possible for this penalty to be a fixed amount as well, irrespective of the balance loan amount.
Apart from repayment flexibility, you must also be able to get your personal loan refinanced if and when need arises. Option to transfer your outstanding loan to another lender can help avail lower interest rates and other facilities in case you find it more beneficial. Balance transfer is also usually clubbed with a top-up loan to borrow more money at discounted rates.
Is the EMI reasonable?
Personal loans are short-term loans with maximum tenure of 60 months (5 Years).
The monthly installments payable against the loan is based on how much you borrow, at what interest rates and by when you agree to close the loan.
It is wise to opt for a loan that you can afford to repay without any delays or defaults. Your EMI must be well within your income so that you have enough funds to address regular monthly expenses.
You can make use of online EMI calculators to work out EMIs across different personal loans by simply keying in the required loan amount, applicable interest rate, loan tenure and other relevant numbers and compare them to find a product with an affordable EMI.
Scouting around for competitive personal loan offerings and comparing them is the ideal way to find an affordable loan. When faced with emergencies, rely on trustworthy references to apply for the right loan or arrange funds from close friends/relatives.