The personal loan interest rates offered by various lenders to the same applicant can vary widely depending on credit-pricing policies and the credit profile of the applicant. Thus, prospective loan applicants should compare the interest rates and other personal loan features of as many lenders as possible.

Many banks offer such loans at preferential interest rates to existing customers. They also offer pre-approved personal loans with instant disbursal to existing customers with good credit profiles. Thus, prospective borrowers should first check with the lenders with which they have deposit accounts or have availed loans or credit cards. The personal loan interest rates offered by those lenders can be used as a benchmark to compare interest rates of other banks/NBFCs.

This should be followed up by visiting online financial marketplaces to compare the rates offered by other banks and NBFCs. Then, they should opt for the lender offering the lowest interest rates and/or quickest disbursal.

Tenure-repayment

Longer repayment tenures reduce the EMI burden but increase the total interest cost. The opposite would be true for borrowers choosing shorter tenures for loans. Thus, applicants should choose loan tenure primarily on the basis of repayment capacity. However, prospective borrowers should not sacrifice their fresh monthly contributions towards their unavoidable financial goals.

Note, lenders usually prefer loan applicants whose monthly loan repayment obligations, including the EMI of the proposed personal loan, do not exceed 55-60% of the monthly income.

Those loan applicants exceeding this limit can either opt for longer repayment tenures and/or opt for lower loan amounts to bring EMI within the aforementioned ratios.

Processing fee, charges

Apart from the interest cost, a personal loan borrower would also incur processing charges, documentation fee, etc. while availing the loan.

While the processing fee can range anywhere from 0.5% to 4% of the loan, some lenders waive it during festive season while some other lenders cap the processing charges irrespective of the loan amount. As the processing fee can have a significant impact on the overall cost of borrowing, loan applicants should use online APR calculators to compare loan offers based on total borrowing cost.

Check charges, curbs

Some lenders do not allow loan foreclosure or prepayment until the repayment of a pre-determined number of EMIs. Lenders also charge 3-5% on prepaying or foreclosure.

However, some public sector banks offer personal loans at floating interest rates, which, as per the RBI norms, are not allowed to charge prepayment or foreclosure fee.

Thus, personal loan applicants seeking to keep the option of part-prepayments/foreclosure open should compare the prepayment related charges and the flexibility allowed in prepayment/foreclosure during the loan selection process. Such applicants should prefer the lender charging nil or low prepayment charges with maximum possible flexibility.

Turnaround time

With the advent of end-to-end digital onboarding processes, most lenders have started offering digital personal loans with quick/instant disbursal. Many lenders also offer pre-approved personal loans to existing customers with instant or same-day disbursal. However, depending on documentation and loan processing, lenders may still take up to seven days to disburse personal loans from the date of loan application.

Therefore, loan applicants requiring quick disbursal should also compare the lenders on the basis of the turnaround time for loan disbursal.

Conclusion

For most personal loan applicants, the best personal loan option would be the one charging the lowest interest rates. However, personal loan features such as the loan tenure (based on one’s repayment capacity), processing fees and turnaround time for loan disbursal should also be considered during the loan selection process.

Prospective applicants should start the process by first contacting lenders with whom they already maintain deposits or have availed loans/credit cards.

Then, they should visit online financial marketplaces such as Paisabazaar.com to check and compare personal loan interest rates and other loan features offered by other banks and NBFCs based on their credit profile.

(The writer is Chief Business Officer (Unsecured Lending) Paisabazaar)

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