New Delhi [India], September 9: Availing a Personal Loan is perhaps the quickest way to meet your financial needs. They require minimal documentation, and you don’t need collateral. As long as you are eligible, the loan maybe approved and given to you almost instantly.
TL;DR
Choose a loan amount that meets your requirement without stretching your repayment capacity.
Look at the interest rate, processing fees, other applicable charges and total repayment amount.
Balance an affordable EMI with the total interest you will pay over the loan period.
Make sure the EMI fits comfortably alongside your existing commitments and regular expenses.
Check eligibility, pre-approved offers, processing timelines and applicable charges before accepting the loan.
Banks may offer different loan options and choosing the best Personal Loan for you does not have to be a guessing game. Here are some things you can do to make the right choice.
Choose the Right Loan Amount
Before jumping into the application process, always consider your need and ability to repay to choose the right loan amount. Avoid borrowing more than you need, as it may lead to higher interest rates and EMIs.
A larger loan generally means a higher EMI and a higher total interest outgo, even if the interest rate remains the same. Borrowing only what you need can help keep your repayment obligation manageable.
Before applying, consider:
- How much do I actually need?
- Can I meet part of the expense from my available savings without compromising my emergency fund?
- What EMI can I comfortably accommodate alongside my existing expenses and EMIs?
The objective should be to borrow enough to meet the requirement, rather than maximising the amount available to you.
Compare Interest Rates and the Total Cost
Banks offer different loan options with different rates of interest. It is important to compare these options before getting a Personal Loan, since the interest rate determines the total amount that you will have to pay back over time.
Also, while the interest rate is an important factor, it should not be the only one you compare. A loan with a lower advertised rate may not necessarily be the least expensive option once other applicable charges are considered.
When comparing Personal Loans, look at:
- Applicable interest rate
- Processing fee
- Other applicable charges
- Loan tenure
- EMI
- Total amount repayable
Choose a Suitable Tenure
Loan tenure determines how long you will make repayments.
A shorter tenure generally means a higher EMI, but you may pay less interest overall. A longer tenure can make the monthly repayment easier to manage, but the total interest outgo may be higher.
For example, if you can comfortably afford the higher EMI associated with a shorter tenure, it may reduce your overall borrowing cost. However, choosing a tenure that leaves too little room in your monthly budget can make repayment difficult.
The right tenure is therefore a balance between affordable monthly repayments and a reasonable total cost.
Example:
| Loan Amount | Interest Rate | Tenure | EMI | Interest Outgo |
| ₹1,00,000 | 10.5% | 2 years | ₹4,638 | ₹11,308 |
| ₹1,00,000 | 10.5% | 5 years | ₹2,149 | ₹28,963 |
Have an Estimate of the EMI
An EMI calculator can help you understand the likely monthly repayment before you commit to a loan.
Enter the proposed:
- Loan amount
- Interest rate
- Tenure
You can then compare different loan amounts and tenures to understand how they affect your EMI and total interest payable.
Importantly, avoid assessing affordability based on the EMI alone. You ought to consider it alongside your rent, household expenses, existing EMIs, savings and other regular financial commitments.
Check Your Existing EMIs and Repayment Capacity
Before taking a new Personal Loan, look at your existing financial commitments.
A new EMI will become a recurring obligation, so consider whether your monthly income can comfortably cover.
If taking a new loan would leave very little flexibility in your monthly budget, consider whether you need the full amount.
Look Beyond “Instant” or Quick Disbursal
Speed can be important when you have an urgent financial requirement, but it should not be the primary reason for choosing a loan.
A digital application and quick processing can make accessing loans easier. However, approval and disbursal are subject to the lender’s terms and conditions.
Understand the Applicable Charges
The cost of a Personal Loan can include more than just interest. Before accepting an offer, check the applicable fees and charges, which may include:
- Processing fees
- Applicable taxes
- Stamp duty, where applicable
- Late payment or penal charges
- Prepayment or foreclosure charges, where applicable
- Other charges specified in the loan terms
Banks often disclose these charges at the time of loan application; however, it may help to inquire about them early on so you can be prepared.
Final Thoughts
Choosing a Personal Loan without carefully considering your options may lead to high interest rates and high EMIs, which may be difficult to manage. This can affect your credit score, and banks may charge a late fee. Always make an informed decision and consult your banking partner if you have any questions.
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