Calculate and compare the total cost of the loan before you sign on the dotted line
In case of urgent cash requirements for unforseen events, most people opt for personal loans. These loans are quite costly, though they may be available at short notice. Ideally, these loans should be taken for short tenures as the interest rates are pretty high, upto 30 percent per annum. Personal loans require minimum paperwork proof of identity, residence, income and bank statements for three-six months are usually sufficient. But before you take a loan, compare the interest rates and charges levied by different banks and financial institutions.
Processing fee
The processing fees are charged on the loan amount and is payable upfront by the borrower, while filing the loan application. This is non-refundable and covers the costs of determining the loan eligibility of the potential borrower. It varies from half to one percent of the loan applied for.
Prepayment penalty
Most banks levy prepayment penalty if loans are repaid before the full term or an agreed minimum period. Prepayment disturbs their cash flow and income estimates and hence the borrower is penalised. The amount varies from 1-5 percent of the outstanding loan amount. Sometimes though, banks do waive off these charges. Remember that the penalty is payable on the balance amount outstanding and not on the total loan sanctioned.
Mode of EMI payment
One should check the EMI to be paid. This would depend on the loan amount,
interest rate and loan tenure. Usually, EMI starts from the month of final disbursement of loans, or the following month. Depending on the cash flow position of the borrower, a decision on this behalf should be taken by the borrower. The timing of commencement of the EMI has an impact on the total interest to be paid by the borrower over the period of the loan.
Advance EMI
In some cases, advance EMI may be payable upfront at the time of disbursal of loan. This effectively increases the cost of loan as the bank is already taking back part of the loan, before even disbursing it.
Security required
Normally, personal loans are unsecured. However, in some cases, the banks may insist on security for the loan. The security may be in the form of shares, securities, fixed deposits, gold, insurance policies, etc. You can pledge these as collateral and obtain a loan against them.
Guarantor
In some cases, a guarantor may be required for the loan as well.
Credit history
The credit history, which is recorded by CIBIL (Credit Bureau India Limited) plays a critical role in the loan application being accepted. A good repayment track record ensures an instant loan approval and attractive interest rates.
