Parameters to consider when comparing personal loans – Forbes Advisor INDIA

Nowadays, personal loans are readily available from various lenders such as banks, non-bank financial companies (NBFCs), and fintech companies, sometimes within hours. However, the range and diversity of these personal loan offers can confuse potential borrowers and cause them to wonder what is best for them.

Applicants end up comparing different loan offers from various lenders and usually the first parameter compared is the interest rate. While there is nothing wrong with that, other aspects can be equally important before a borrower settles on the best loan option.

Also, be aware that legacy lenders and new-age entities are like apples and oranges and should ideally not be compared. Indeed, the speed of disbursement, loan amounts and other services can vary enormously.

Here are some general guidelines to help potential borrowers make an informed call:

Assess Loan Category

Personal loans are of two types – unsecured and secured. The terms and conditions of each type may vary. For example, compared to secured loans, unsecured loans attract a higher rate of interest.

Conversely, a secured loan requires the applicant to pledge an asset as collateral. In the event of default, the borrower risks losing this asset. Unsecured loans do not present this risk since no assets are pledged. According to his needs, choose what is preferable.

Compare various interest rates

Loan comparison websites can help borrowers check interest rates from banks and other lenders. Once the appropriate lenders have been shortlisted, inquiries can be made to check other terms and conditions and decide which option works best. Most lenders’ rates will fall into broad categories with small differences.

A word of caution when checking out lenders, carefully read the FAQs on lenders’ websites to compare processing fees or collateral required, among other factors. Based on your research, apply for a loan only from the specific lender you have pre-screened, as too many difficult applications could make lenders suspicious. This means that the lender may contact a credit bureau to check a potential applicant’s credit history, which may impact the person’s credit score.

Note that many lenders offer promotional offers or programs, which can reduce the final interest rate. Check to see if there are any, which can help reduce the interest rate and monthly payments. .

Decide on the right type of lender

Personal loans are offered by traditional lenders such as banks and conventional NBFCs, as well as new era lenders such as fintech companies and digital NBFCs. While banks and other traditional lenders have lower interest rates and disburse larger amounts, on the other hand, they require elaborate documentation and more time before loans can be disbursed. If funds are needed urgently, these lenders may not be suitable.

Conversely, while fintech companies and NBFCs charge higher interest rates, they require little or no documentation, as a customer’s creditworthiness is quickly checked online through credit analysis. data and the exploration of social media, among other digital means. As a result, loans can be disbursed within hours.

Additionally, fintech companies can approve loans even if an applicant does not have a credit history or a healthy credit score. The additional risk is offset by higher interest rates. These lenders will also provide extremely short term loans in small note sizes, which conventional lenders will not.

Depending on the urgency and their comfort level with interest rates, applicants can choose one of two types of lenders.

Ask about additional or hidden fees

Personal loan applicants should also check for additional or hidden fees, which could inflate total borrowing costs. Processing fees are part of these fees and may vary from lender to lender.

Remember that, upon request, lenders can sometimes waive (or reduce) some of these additional fees. These charges may include prepayment charges, late payment penalties, administrative fees, as well as legal and collection fees, etc.

In total, the additional fees could vary between 1% and 3% of the total loan amount. In some cases, the additional fee may be deducted from the disbursed loan amount. Therefore, it is better to find out about these fees in advance rather than being caught by surprise later.

Check eligibility standards

Not all applicants may be eligible for loans from traditional lenders due to their higher standards. One can do research online discreetly to verify where an applicant is eligible for personal loans.

Once this is clear, it makes sense to only go to these lenders to avoid multiple loan applications that could lead to difficult inquiries and hurt credit rating.

Know the total duration

The importance of loan tenure cannot be underestimated, as it will decide whether borrowers can comfortably afford EMIs. Choosing the wrong tenure could lead to financial hardship later on while increasing the risk of default.

Different tenures and EMI options should be evaluated to ultimately decide which one is best, based on one’s income, needs, and ability to repay. Online calculators can help make the decision.

Check on loan insurance

Nowadays, lenders can require borrowers to take out an insurance policy with their loan, whether the loan is secured or unsecured. In the case of unsecured loans, this protects lenders against the risk of loss in case the borrower encounters an unforeseen eventuality.

But for borrowers, however, insurance comes at a premium, further inflating borrowing costs. If insurance is compulsory, choose a policy offering maximum coverage with a reasonable premium.

Understand the application process

The procedures for processing loan applications may differ from one lender to another, resulting in a time and cost differential. For applicants looking for emergency funds, fintech companies and other new era lenders are a better proposition since their loans are sanctioned online with ease, efficiency and simplicity.

But if higher interest charges may be a hindrance and time is not a constraint, traditional lenders are more appropriate. In this case, applicants should be prepared for the elaborate documentation that banks require to process loans.

Once the application process is clear, borrowers can keep all relevant documents ready to expedite the process whenever possible. Such requests would require proof of identity and address, salary slips of at least three months, bank statements of three to six months, passport-size photos, etc.

If speed of disbursement is essential since funds are urgently needed, minimal documentation and online processes of fintech companies will work better for loan applicants.

Conclusion

Whichever lender the borrower chooses, personal loans have certain advantages over commodity loans. Unlike home loans, car loans, education loans, etc., which must be used for predetermined purposes, personal loans can be used for various purposes.

These can vary from buying a vehicle, home improvement, buying a property, travel expenses, education expenses, wedding expenses, consolidating various credit card debts credit and other requirements, no questions asked.

Whatever the purpose, personal loans are ideal for meeting unforeseen and non-emergency financing needs.

Stephen V. Lee