10 Basic Rules To Get The Best Deal For A Personal Loan

A personal loan is a short- to medium-term loan that can be obtained quickly, assuming the lender considers the borrower creditworthy, to satisfy monetary needs.

Personal loans are usually unsecured. This means that the borrower is not required to put up any collateral as security with the lender. But if required, personal loans can also be taken out by putting up a collateral.

As unsecured personal loans do not require collateral, lenders incur a greater risk when making such loans. As a result, these loans have higher interest rates than secured personal loans. In either case, prospective borrowers can follow some basic rules to get the best deal possible from lenders.

1) Research and Secure The Best Rate of Interest

When it comes to loans, interest rates are perhaps the most significant factor to consider. One must always evaluate loan offers from multiple lenders and choose the one with the lowest interest rate.

As unsecured personal loans attract a higher rate of interest, lenders are keen to disburse such loans. Therefore, if a borrower has the required documents and a good credit record, the lender will be keen to provide the loan and may be willing to negotiate the best rates it can offer. At times, lenders also provide pre-approved personal loans to existing clients that have a steady income and a good track record of repaying loans on time.

2) Choose A Trusted Lender

While almost all banks, non-banking finance companies and fintech platforms offer personal loans, the terms and conditions often differ. Usually, banks offer lower rates of interest than NBFCs and other fintech platforms as have stricter personal loan eligibility criteria to fulfil and access to a vast deposit base. One should research on the lender and its reviews to choose what suits one best.

3) Ensure Complete Documentation

The application form and other supporting documentation are equally significant in obtaining a loan. Prospective borrowers must fill out the application form completely and submit all required papers, such as salary or income proofs and bank statements. They must also provide their correct name, address, and other personal information.

Incomplete or incorrect documentation may cause lenders to reject the loan application.

4) Maintain A Good Credit Score

A strong credit score implies good financial health because it reflects one's ability to repay loans on time. Creditworthiness, as represented in the credit score, determines one's ability to acquire a loan from a bank. Furthermore, the borrower's credit score may influence loan terms, particularly the interest rate.

5) Avoid Default on Loans

If one wants to maintain a good credit score, it is important to make EMI payments on schedule. If there is a history of a loan, then this will help you retain a good credit score which is key to obtain good terms for a personal loan.

6) Decide Tenure Carefully

The borrower should decide on the repayment term of a personal loan thoughtfully because it influences the equated monthly installment, or EMI, that must be paid and the total interest payable on the loan. A longer term would result in lower EMIs, whilst a shorter term would need the borrower to make a greater monthly payment. However, a longer tenure would imply that the borrower would pay a greater interest rate over the life of the loan. Choosing the best tenure, then, is advantageous because it can help a borrower save money in the long run.

7) Watch Out For Extra Charges

Besides the interest rate, there are many other costs like loan application processing fees, administrative charges, prepayment charges and foreclosure charges levied by banks and non-banking finance companies. All these together eventually push the total repayment amount higher for the borrower.

8) Check Prepayment Terms

Many borrowers often want to settle their loans and debts ahead of schedule. But sometimes that may invite a penalty for prepayment.

It is important to be aware of the payback charges and when to prepay. If the prepayment penalties are high and the majority of the loan term has expired, it may not be prudent to proceed. This is because the interest component decreases as the loan term lengthens. As a result, when prepaying, one should compute the principal and interest remaining on the loan.

9) Look For Offers

Always be on the lookout for seasonal or festive discounts made available by lenders from time to time. On personal loans, a lender may make special incentives such as no processing fees or a lower interest rate. Lenders may offer speedier disbursement if a loan is obtained using a credit card.

10) Lock-In Period

Most lenders have the provision of repayment of loans ahead of schedule. However, they may have a lock-in period before which a personal loan cannot be prepaid. A borrower must be aware of the lock-in for better financial planning.

Conclusion

The process of obtaining a personal loan and securing a good deal usually begins with a search for a good lender and the lowest interest rate. If one has to negotiate for the best rate, a decent job profile, a high credit score, and a strong credit history will come in handy.

While banks may provide cheaper interest rates, their approval processes are often longer and their eligibility requirements are more severe. Personal loans with minimal documentation are made easier by NBFCs such as IIFL Finance. 

In fact, IIFL Finance processes a personal loan application within minutes and credits the money into the borrower’s account within 24 hours. Moreover, it also offers competitive interest rates than other NBFCs.