Kolkata: When one needs funds in time of an emergency, a personal loan comes in handy. Personal loans are nothing but unsecured loans that can be obtained easily if one has a regular income. Here are 5 ways to choose the best personal loan.
1. Choose a loan with the lowest interest rate: Since personal loans are unsecured loans, they charge very high interest rates which can start from 11 per cent and go up to 20 per cent. When taking a personal loan, always shop for the lowest interest rate. This can be done very easily online. A small difference in interest rates would mean significant difference in loan costs. Remember that banks and lending institutions decide your interest rate based on several factors like how reliable your income is, your credit score and so on. If you avail a loan from a bank you have a relationship with, you may be offered a lower interest rate.
2. Look at other fees and charges: While interest rates are important, other charges by a bank needs to be considered too. One of the important charges is the processing fee which is between 1-3 per cent of the loan, at times with a maximum and minimum limit. Sometimes banks have offers where they have discounts on their processing fees. Another charge to consider is the pre-payment penalty which is also a calculated as a percentage of the outstanding amount. When you have extra money at your disposal, prepaying a loan can help you save on interest rates, but a higher prepayment fee could be a spoiler.
3. Check your ability to repay the loan: When taking a personal loan, it is very important to be sure that you are able to pay it back. To find out how much your EMI would be, use an EMI calculator. You need to enter details like loan amount, interest rate and tenure and the calculator displays the EMI. Your EMI should be such that you can pay it back without straining your finances. For this, you need to analyse your cash flows carefully. The total portion of your income that you pay as EMIs should not exceed 40 per cent of your total take home income. Here, deciding on the loan tenure also plays an important role. A shorter tenure means a higher EMI and vice versa, but a longer tenure means paying higher interest rates. Keep all these factors in mind before going for a personal loan.
4. Get a fix on the loan amount: Banks will offer you a loan amount that can be higher than what you require. However, you should evaluate your needs properly to evaluate how much loan you should take. If a personal loan is for a need like a wedding or a holiday, first get an estimate of the costs, see how much you can fund from your own pockets and then look for a loan to fund the remaining amount.
5. Avoid falling for gimmicky offers: You would in all probability be bombarded with personal loan offers. They would promise high loan amounts, low interest rates, easy disbursals and so on. However, be wary of offers that are too good to be true. Just because someone is offering you a ‘pre-approved’ loan offer is not reason to fall for it. Read the fine print before making a decision.
To round up, personal loans are high cost loans that should be avoided and taken only as a last resort. It is thus important to do proper due diligence before choosing a personal loan.