By Amarjeet Tiwari
Personal loans grew by 30.8 per cent in August 2023 as compared to 19.4 per cent in 2022, while total credit to the segment stands at Rs 47.7 trillion, according to the Reserve Bank of India (RBI). The growth shows how bank loans are a go-to option for individuals who are looking to fund their needs and various emergency expenses. They have gained immense popularity due to their ability to cater to a wide range of financial needs.
Whether it's home renovation, purchasing big-ticket items, covering wedding costs, handling unexpected medical bills, or more, personal loans can provide the financial support you require. Several banks offer personal loans with convenient features such as online mobile banking apps, easy repayment options, and often without the need for collateral, making them an attractive option for managing personal finances.
Before you dive into the world of personal loans, it's crucial to be well-informed to make the right decisions. In this article, we'll provide five essential tips to guide you through the process.
Assess Your Needs
The first step in obtaining a personal loan is to understand your needs. Take a moment to evaluate why you need the loan and how you plan to use the funds. While personal loans offer flexibility, they should be used for valid financial purposes. For example, taking out a personal loan to invest in a speculative financial scheme is risky, as returns are not guaranteed. Ensure your reasons for borrowing are justified and that you can commit to repaying the EMIs on time before applying for a personal loan.
Review Your Credit History
Your credit history plays a significant role in determining your eligibility for a personal loan. Banks will examine your credit score to assess your creditworthiness and ability to repay the loan. As there is no minimum acceptable credit score and it varies but the standard score of 750 or above is good to go. A strong credit score leads to increased chances of approval and therefore, it's advisable to maintain a good credit history by making timely payments.
Compare Interest Rates
Interest rates are a critical aspect of personal loans, as they impact the overall cost of borrowing. Before applying for a personal loan, it's prudent to compare the interest rates offered by different banks. The interest rate offered by the banks varies and can be anywhere between 10.50 per cent and 24 per cent per annum and for NBFCs they can go as high as 40 per cent per annum depending on your credit history, therefore it is advised to compare and then go for the most suitable option. By doing so, you can select the most affordable option, which will help you save on interest payments.
Consider Additional Charges
In addition to interest rates, banks may impose various charges associated with personal loans. The fee can include processing fees, prepayment charges, late payment fees and partial payment fees among others. When it comes to the processing fee, it usually depends on two factors which are the lending bank or the applicant and can range up to 5 per cent of the sanctioned amount. Being aware of these additional costs is vital as it allows you to calculate the overall affordability of the loan. Consider these charges and their potential impact on your budget.
Determine Your Repayment Capacity and Tenure
It's essential to have a clear understanding of your financial situation to assess your ability to repay the loan. Before applying for a personal loan, calculate the EMI amount that you can comfortably manage. Ensuring you have sufficient funds to meet your EMIs is crucial for a successful borrowing experience. Additionally, it's crucial to remember that missing a loan EMI can result in penalties, which can increase the overall cost of the loan.
Personal loans are a valuable financial tool that can help you meet various financial needs. However, it's essential to approach them with careful consideration. By understanding your needs, maintaining a good credit history, comparing interest rates, accounting for additional charges, and ensuring affordable EMIs, you can make the most of a personal loan while avoiding financial pitfalls. Responsible borrowing and timely repayments are the keys to a successful personal loan experience, leading you towards financial stability and achieving your goals.
The writer is the head of technology at SahiBnk, powered by Manipal Business Solutions.
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