If you are looking out for some cash to meet your financial obligations, a bank loan may just be your best bet! However, choosing a loan product is not as easy as picking up a vegetable on your way home.
It requires some deliberation, especially with respect to the rates at which the loan is being offered, the type of product, the additional charges, and more.
I have come up with a quick guide enlisting all the aspects that need your attention so that you can conveniently choose the Personal Loan that is best-suited for your situation.
Know the Interest Rate
It is vital to understand how the Personal Loan Interest Rate structure works. For instance, say you are given an option to choose between 10.20% and 11.80%. Now any one would say choose the lower rate. However, when you’re told that the former is a flat rate of 10.20% and the latter is a reducing rate of 11.80%, the latter will be more cost-effective.
The foremost thing to remember here is that with each EMI that you pay, your principal amount reduces, thereby your overall EMI would also reduce, which is only possible with a reducing balance rate. Banks are notorious for using flat rate for luring customers, and hence it is your onus to know the difference between the two types of interest and calculate the cost of the loan judiciously.
Calculate your EMI against your Monthly Income
While the process of applying and getting approved for a popular credit product such as the HDFC Bank Personal loan is rather hassle free, you must ensure that the loan is repaid in a timely manner. In this regard, you must be sure of your ability to repay the loan. To do so, use any Personal Loan EMI Calculator Online, and enter in the loan amount you wish to take, complete with the expected rate of interest and desired tenure. Once you get the expected EMI, compare it with your monthly income.
As a rule of thumb, all your EMIs combined should not exceed 50% of your monthly income, so that you can easily manage your living expenses and meet other financial needs.
Check your CIBIL Score
One of the most significant aspects that determine the approval of your Personal Loan application is your CIBIL Score. Only if you enjoy a respectable score of 700 or above, will any leading bank or an NBFC will consider your application since a high score reflects good financial health. If your score is low, it is better to try and improve your score before applying for a loan. Not only will this increase your chances of getting approved for the loan, but will also ensure that you receive a loan at a comparatively lower rate of interest.
Type of Employment
It is a well-known fact that most banks prefer offering loans to salaried individuals who work for reputable organisations, as against business owners or self-employed professionals. This is owing to the fact that salaried people enjoy greater job stability as well as a steady stream of income as opposed to self-employed individuals. Hence if you are a salaried employee, ask your bank for a lower lending rate and in all probability, they will oblige you with best quote.
Moreover, if you are married, it may prove to be beneficial for you to apply for a loan in the name of the spouse who enjoys a higher salary, or a higher income (for self-employed individuals) for that matter.
Purpose of the loan
Whether you wish to obtain a Personal Loan for home renovation or for a wedding, for sponsoring your child’s higher education or for travelling, it is highly recommended that you state the purpose of the loan clearly, and do not try to mislead the bank. Not only will any misinformation lead to the rejection of your application, but it might also leave a dent in your Credit Score. Besides, most banks offer different types of Personal Loan to offer customised credit products to the customers. You may stand a chance to benefit from the loan type that aligns with your needs, with respect to loan rate and other terms.
Know the Processing Fee, Prepayment and Foreclosure Charges
The cost of Personal Loan can increase depending on the processing fee that your bank levies. Hence, it is best to know the same in advance to avoid any last-minute hassle.
If you are planning to make additional payments towards the loan in part or full, make sure to be aware of the prepayment as well as the foreclosure charges levied by your lender. Also, know the terms and conditions in this regard, so that you can carefully plan your prepayment in accordance with the same.
Life Insurance with Personal loan
A vast majority of banks offer life insurance cover with your loan such as in case of YES Bank Personal Loan, which is intended to safeguard your interests in case of any unfortunate incident. In case of death, not only will the insurance provider covers you by paying back the outstanding loan amount to the lender, but may also pay an additional amount to your family.
However, the insurance comes at a cost, which may range anywhere from 1 to 5% of the loan amount. Here, you will be required to pay the insurance premium along with the interest on the same, which will definitely be an additional expense. Make sure you’re aware of the same at the time of applying for the Personal Loan, and carefully calculate the effective cost of loan.
These are some of the important parameters you must know about prior locking a deal with the bank. While you can always try and approach various lenders to learn about loans available in the market and compare the same, a more convenient way is to use the services of an online loan aggregator. Using an online loan service can help you compare the best loan offers at a go, ensuring an informed decision without a delay.