It is common these days to receive an SMS or advertisement, at least once daily, from a loan provider that promises you instant personal loan at an attractive interest rate. These interest rates are usually quoted at a lower band to make it attractive for consumers, but mostly it is not what you get at the end of application process. Thus, regardless of high or low interest rate is, while availing personal loan there are other important factors that should be given equal importance.
One may need funds in case of an emergency such as wedding, renovation of home, etc, and personal loan comes to rescue if taken with diligent effort. You should always look beyond interest rate. Some factors to consider are:
Cost of processing fee – Generally, consumers ignore the cost processing fee, which is 1-2% of the loan amount. Some lenders charge charge a flat fee. Given a competitive segment within personal loan business the processing fee differs from one bank to another. Hence, you should compare this cost to select a lender with lower processing fees.
Pre-closure or pre-payment terms – We tend to borrow in order fund our emergency needs occurring at eleventh hour. The intention is to pay this borrowed money before our liquidity position improves, and subsequently save on interest cost. You should consider the pre-closure condition and penalty cost associated with such facility, and chose lower penalty cost.
Late payment fee – Sometimes we skip or make late Equated Monthly Installment (EMI) payment due to cash crunch. Making a late EMI payment also attracts unnecessary penalty cost for borrowers. Therefore, if you expect a shortage of cash flows to service EMI at some point, then you also need to check and consider penalty rate.
Loan approval process – The process involved in personal loan will vary from one lender to another depending on internal condition. However, as we borrow personal loan solely to address immediate requirement, the approval process should be quick and easy.
Borrow based on you needs – Personal loans charge higher interest rate as compared to other loans and it is one of the most expensive forms of debt. So if your short-term need is Rs 2.50 lakh then borrow only that much. Although you will be eligible to borrow more due to your strong credit position, it doesn't make sense to pay unnecessary interest cost.
Safety of pledged or collateral papers – Personal loan is mostly unsecured, unlike home loan or car loan that needs collateral. However, some lender ask for pledge or collateral even for personal loan and require a confidential information of borrower to be submitted. As such you should check the security level of lender and safety measures to store your papers or data. The papers should be available to you on completion of obligation period.
Smart loan options – Few lenders offer additional schemes on personal loan, such as option of part or full payback without any charges. Explore and compare all the additional benefits available with personal loans and accordingly chose the lender. However, don't get lured with add-on offers that will increase your EMI cost. One classic case is pitching accidental insurance plan without any premium cost. But in such cases insurance premium usually gets added with EMI.
Personal loan is an expensive liability that requires a basic homework from borrower's end. This will not only help you to minimise the overall cost, it will also keep you informed beforehand about proactive measures. The most important element to keep in mind is to borrow only when it is required, on an emergency basis, and not on whims and fancies.
WHAT TO LOOK FOR
- Check processing fee, pre-payment terms and late payment fee
- Ensure loan process is quick and easy and don’t fall for bundled offers
The writer is founder and CEO, 5nance.com
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