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Tuesday, June 7, 2016

Taking a Personal Loan

 Personal loan as the term implies is a loan taken to meet the personal needs of the borrower which can include purchasing home appliances, paying for medical emergency, buying an iPhone or spending on marriage etc. Typically, personal loans should be last resort for borrowers looking to arrange money on an urgent basis and for those who do not have a security or collateral to offer. Personal loan requires lower documentation and processing as compared to other loans such as home loan and hence, offers a quick turnaround for borrowers who are looking for urgent funds. However, personal loans are unsecured (without any collateral) for banks and hence, carry a higher rate of interest compared to other loan products such as a car loan or home loan. Hence, the typical trade off while taking a decision to avail a personal loan is between paying a higher rate of interest vs. getting a loan sanctioned quickly with minimal paperwork and no collateral to offer. Here are a few aspects which a borrower should consider and evaluate before taking a decision to avail a personal loan:
  • Consider the option of providing a security to the lender, if possible.

    It is not necessary to be able to offer a house or a property to avail a loan at lower rate of interest. There are other securities which can be offered as collateral to get a loan at a lower interest rate than that of a personal loan. As a borrower, you should evaluate the option of offering securities such as National Saving Certificates, Fixed Deposits with banks, gold, and insurance policies to be able to get personal loan at low interest rate. Always check with your lender on the kind of securities it accepts as collateral. Loans against above securities are easier to process, with low documentation work and also come with relatively low interest rates vis-a-vis personal loans.
  • Compare rate of interest:

    Unlike several of the other highly competitive loan categories of home loans and car loans, where the range in interest rates are not too high across banks, the rates on personal loan can have a wider range. So, it becomes important for the borrower to carefully compare the prices and terms offered by different lenders for personal loans.
    Further, majority of banks offer a fixed rate of interest on personal loan during the loan tenure. So, it becomes important to understand the implication of a fixed rate loan on your monthly obligations especially in an economic scenario where interest rates are expected to come down in the near future.
  • Check your eligibility and CIBIL score before applying:

    Different banks calculate eligibility using different parameters and hence the personal loan eligibility may vary across banks. Use MyLoanCare Personal Loan Eligibility Calculator to estimate your eligibility of various banks before applying.
    Your CIBIL score plays an important role in deciding your personal loan application. Hence, it may be advisable to check your CIBIL score before applying. Target a score of 750 of above and a clean CIBIL report to get a personal loan with ease.
  • Try to get a relationship discount with your existing bank:

    Further once you decide to take a personal loan always check for a deal with your primary bank. Banks typically bank give priority to their existing customers for personal loans and may also offer a relationship discount to their existing customers.
  • Calculate and compare all-in-effective cost of personal loans

    Like car loan and home loan, banks charge foreclosure and processing fees for personal loans as well. These charges can range between 3-4% of the loan amount and further add to the cost of personal loans. Hence, a customer should compare and analyse the all-in-cost of personal loans including interest charges, processing fees and foreclosure charges before taking a decision to borrow from a bank.
    In short, personal loan are very helpful for people who need urgent funds. However, it needs a careful evaluation of loan offers from multiple banks before taking a loan decision as key loan parameters can vary significantly from one bank to another.
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