Personal loan

14 things to know before taking out an unsecured personal loan – Forbes Advisor INDIA


There are many times when a person needs short term funds. These could include a child’s higher education, marriage-related expenses, medical emergencies, and other scenarios. In such situations, a personal loan is the best and quickest remedy.

Unsurprisingly, a survey by a consumer finance company found that medical emergencies accounted for 28% of personal loans while 25% went to family needs such as wedding expenses, child rearing and home renovations. . Almost 77% of respondents have opted for personal loans in such cases.

Benefits of personal loans

Apart from faster disbursement, personal loans have another advantage over other loans: they can be used for a variety of purposes without asking questions. For other loans, the purpose is well defined as for mortgage loans, cars, two-wheelers, gold or studies, thus limiting the use.

Pre-approved offers

Being unsecured loans despite the somewhat higher interest rates, people prefer personal loans as they are advanced without unnecessary hassle. Also, when it comes to offering personal loans to their trusted clients, many lenders offer pre-approved offers.

Typically, these are given to borrowers with salary accounts. Periodically, lenders may send messages to these clients about pre-approved personal loan offers. Although these are readily available, financial experts advise clients to take out such loans only when necessary and not because of their easy availability.

Amount and schedule

Once the requirement is established, potential borrowers can check their lender’s mobile banking service for relevant loan offers. There are two things the borrower should be clear about before proceeding. First, the amount of funds required. Two, the period for which the loan is required.

Importance of the mandate

The other key point is deciding on the length of your loan. Personal loans are granted for terms ranging from one to five years. While a shorter term is better because you will pay less interest, the EMI will be relatively higher. So decide on the length based on repayment capacity and convenience.

If you only need the cash for the short term and can repay with a higher IME, a personal loan via a lower tenure is better. If in doubt, it is safer to choose a longer term.

Compare interest rates

Subsequently, the borrower is advised to compare the interest rates offered by different lenders. Although a customer’s credit rating is the same, different lenders may offer variable rates to the same person. Indeed, each lender, whether traditional or new age, follows a personalized and individual risk assessment.

Personal loans are generally made to preferred clients at interest rates ranging from 15% to 36% per annum. Lenders will likely charge a higher rate if the perceived risks are higher. Risk assessment is based on credit score, job profile, employer reputation, payment history, relationship with lender, and various other factors.

Secured Personal Loan

A personal loan can be obtained at a lower interest rate by opting for a secured personal loan. These are backed by guarantees such as a fixed certificate of deposit, vehicle papers, gold, etc. Secured personal loans are easier to obtain because the bank can keep the collateral in the event of default.

Decide on the lender

In addition, depending on the urgency, borrowers could opt for either a personal loan from a bank or a fintech lender. Typically, banks can take a week or more to approve and disburse a personal loan. On the flip side, digital lenders can do the same in minutes, if all of the Know Your Customer (KYC) documents are clear.

The reason banks and other traditional lenders take longer to approve loans is because they have heavy documentation requirements and the risk assessment process usually involves a lot of manual steps as well. On the other hand, fintech lenders focus on speed and convenience and assess eligibility using online data sources including social media profiles and credit history details.

Therefore, if time is of the essence, fintech lenders are the quickest option. Nevertheless, it is important to first make sure that one is eligible for a personal loan according to the standards of a specific lender. In this case, it makes sense to go only to the lender whose borrower can meet the eligibility criteria.

Know the eligibility standards

When it comes to eligibility standards, among others, lenders will consider the applicant’s current income, current employer, repayment capacity, credit rating, and monthly payment obligations. Here, the credit score is crucial, as a higher score can improve the chances of approval as well as more favorable terms.

Terms and conditions and loan amount

Assuming the potential candidate is eligible for a loan from traditional and digital lenders, the next step is to perform a comparison of their terms and conditions as well as interest and fees. It is important to compare the full range of fees and other terms and not just the overall interest rate.

The next essential element is the loan amount available. This will depend on the risk appetite and internal policies of the lender. While banks can give personal loans up to INR 50 lakh, new age lenders can only make personal loans up to INR 5 lakh. But there may be exceptions to the above.

Checking the credibility of the lender

While borrowers usually don’t care about the lender, it’s a good idea to check the credibility of the business before borrowing to avoid unwanted complications later. With banks, credibility is not an issue. However, with digital lenders, it is important to check the Reserve Bank of India (RBI) registration status and disclosure standards of the lender. It may also be helpful to refer to other users’ reviews and the rating on the Google Play Store or Apple App Store.

Both positive and negative feedback can determine whether a lender has had an honest and direct relationship with their clients. The question is whether the lender engages with borrowers when they have problems and tries to resolve them. negatively, you should reconsider the loan agency.

Guaranteed gold loan

Consider your short and long term interests when applying for a personal loan. If an unsecured personal loan solves a short-term problem but creates long-term problems, it is advisable to consider another form of financing such as a secured gold loan to resolve the current problem.

Of course, secured gold loans have their pros and cons, such as their short repayment term. People should therefore carefully weigh all of their options before choosing the best choice in their current situation.

Check the fine print closely

For this reason, borrowers are always advised to read and re-read the fine print. Most people make the mistake of ignoring the terms and conditions altogether or rushing to check them. Later, they regret it when they cannot fully meet the strict repayment terms.

So take your time to understand the terms. Ask questions if you are still unsure of the specific standards. Check for late payment, prepayment, and foreclosure fees on the loan. Only after clarifying these points should you proceed to the signing on the dotted line.

Clarify your doubts

Fortunately, all terms and conditions are posted by organized lenders on their website. So you don’t have to read these standards in a hurry at the last minute. Once you have read the conditions beforehand, write down your doubts and clarify them before accepting the personal loan.

Credit scores and prepayment

Nonetheless, clients must meet KYC’s minimum requirements and maintain a good credit rating. The latter will help borrowers get loans at a slightly lower interest rate. A credit score above 750 is considered good by all lenders.

Borrowers with credit scores below 750 may still be eligible for personal loans from fintech companies. But the interest rates will be higher since the lenders have to compensate for the increased risk of these unsecured loans.


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