How To Choose The Best Personal Loan Lender

Personal loans have emerged as one of the most popular loan products offered by banks and non-banking finance companies over the past decade or so. People are opting for personal loans not just for meeting cash requirements during emergencies but also for weddings, vacations, and household purchases.

Personal loans are unsecured in nature, which means applicants do not have to provide any collateral or security to the lending institutions to avail funds. This is also the reason why people choose personal loans when they are in urgent need of funds.

Given the rising demand and competition among lenders, most of us may have often received text messages or phone calls from banks and non-bank finance companies offering personal loans at attractive rates. The bank with which you have your salary or savings account may readily offer you a personal loan but it is a good idea to scan through other lenders for the purpose of comparison.

Before you finalise taking a personal loan, there are a few things that must be kept in mind to ensure that repayment is manageable and that it does not force you to cut down on their expenses. This checklist may help you zero in on a lender that is best suited as per your requirements such as loan amount, EMI amount, and repayment period.

Loan Amount 

While banks may be chasing you with a big-ticket personal offering, it is important to understand your requirement first. After finalising the amount, borrowers can check the websites of banks and NBFCs because each of them offers a minimum and maximum amount and then shortlist the lenders that match their requirement. Remember that interest rates on personal loans are higher than secured loans such as a gold loan, and a higher loan amount will translate into higher EMIs. That is why it is necessary to keep the amount limited to your requirements.

While banks offer higher amounts and comparatively lower rates, the processing time is slow compared to non-banking finance companies.

Interest Rate

Currently, the interest rate on personal loans starts from around 9.50% and can go upwards of 15-20%. So, even if you have a pre-approved offer from your home bank, there is no harm in checking interest rates charged by other lenders. It is possible to find a lower rate, which can help bring down your EMIs.

The ultimate interest rate charged by banks and NBFCs depends on factors like monthly income, credit score, etc. Many online aggregation websites provide a list of banks, making it easier to compare the charges of different lenders. There are also online calculators that help arrive at monthly EMI after entering the loan amount, interest rate, and period of repayment. One way to check is the EMI amount per Rs 1 lakh of loan.

Processing Fees

The cost of a personal loan is not only dependent on the interest rate but also on other charges such as processing and verification fees. These are the costs that the banks and other lenders incur while reviewing your application. While the processing charge may look small compared to the loan amount, it can add up to the final cost of your personal loan. Processing fees charged by lenders typically range between 0.5 % to 2.50% of the loan amount.

Usually, banks also provide minimum and maximum processing fees on their website so that borrowers can take an informed call. Some banks also waive such charges as part of festival season offerings.

Processing fees can be paid upfront at the start. Alternatively, banks and NBFCs can also deduct it from the loan amount before disbursement.

Banks also levy verification charges. While processing the loan application, banks may rope an external agency to verify the creditworthiness of the borrower. To do so, lenders have to incur an additional cost, which is recovered from the personal loan applicants in the form of verification charges.

Flexible Repayment

It is important to choose a bank or NBFC that gives you flexible repayment options in terms of tenure. Ideally, a personal loan should be repaid as soon as possible to avoid the interest burden. But for personal loans of large amounts, choosing a lender that offers longer repayment tenure is important because, in a shorter tenure cycle, the EMI amount may turn out to be bigger.

Foreclosure Fees

This is also a crucial factor when choosing a personal loan lender. In case you decide to repay the loan before the tenure or stipulated period—with the money you may have received in bonus or gift from a family member—banks and NBFCs charge a foreclosure fee to make up for the loss on interest. This usually ranges between 2% and 4% of the outstanding amount. So, make the assessment if saving interest is big enough before opting for early repayment.

Borrowers must also check other fees such as a penalty that lenders charge on defaulting on EMI. Banks also levy a small fee if borrowers request a duplicate loan repayment schedule.

Conclusion

Taking a personal loan has become easier with minimum paperwork and attractive offerings. However, borrowers must not blindly accept such offers and should review terms and conditions by running a checklist. They should compare the interest rate, charges, and repayment flexibility among different lenders to get the best possible offer.

IIFL Finance, one of India’s top NBFCs, has made the process of application easy and simple. Within a few clicks, an application can be made through an online process, cutting down on the hassle of physical paperwork. IIFL Finance offers personal loans of up to Rs 5 lakh for tenure as long as three-and-a-half years at competitive interest rates.