There are many occasions when a person is in need of money in the short term. This could include a child’s college education, marriage expenses, medical emergencies, and other scenarios. In such situations, a personal loan is the best and fastest option.
Unsurprisingly, a survey by a consumer finance firm shows that medical emergencies account for 28% of personal loans, while family needs such as wedding expenses, parenting and home renovation account for 25%. Almost 77% of respondents opted for a personal loan in such cases.
Benefits of personal loans
Aside from providing faster payouts, personal loans have another advantage over other loans – they can be used for a variety of purposes with no questions asked. For other loans, the end purpose is well defined, such as home, car, two-wheeler, gold, or education loans, which limits their use.
Since these are unsecured loans, despite the slightly higher interest rates, people prefer personal loans as these are paid out without unnecessary problems. When it comes to offering personal loans to their trusted customers, many lenders give pre-approved offers.
Typically, these borrowers are granted with salary accounts. From time to time, lenders may notify such customers of pre-approved personal loan offers. Although these are readily available, financial experts advise customers to only obtain such loans when they are needed and not because of their ready availability.
Amount and timing
Once the requirement is established, prospective borrowers can check their lender’s mobile banking feature for relevant loan offers. The borrower needs to be aware of two elements before proceeding. First, the amount of funds required. Second, the length of time that the loan is needed.
Importance of the term of office
The other important point is deciding on the term of your loan. Personal loans are granted with terms between one and five years. While a shorter tenure is better because you pay less interest, the EMI is relatively higher. So decide the tenure based on repayment capacity and convenience.
If you only need short-term money and can repay with a higher EMI, a personal loan over a shorter term is preferable. When in doubt, it is safer to choose a longer term.
Compare interest rates
After that, the borrower is advised to compare the interest rates offered by different lenders. While a customer’s credit rating is the same, different lenders may offer different rates to the same person. This is because every lender, traditional or new age, pursues an individual, bespoke risk assessment.
Personal loans are typically given to first class clients at interest rates that range from 15% to 36% per annum. Lenders are likely to charge a higher interest rate if the perceived risks are higher. The risk score is based on creditworthiness, job profile, employer reputation, payment history, relationship with the 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 securities such as time deposit certificates, vehicle papers, gold, etc. Secured personal loans are easier to come by because the bank can keep the collateral in the event of a default.
Decision on the lender
In addition, depending on the urgency, borrowers can opt for a personal loan from a bank or a fintech lender. In general, it can take a week or more for banks to approve and pay off a personal loan. Digital lenders, on the other hand, can do the same thing in minutes if all of the Getting To Know Your Client (KYC) documents are clear.
The reason banks and other legacy lenders take longer to approve loans is because they have high documentation requirements and the risk assessment process usually also involves many manual steps. Fintech lenders, on the other hand, focus on speed and convenience and evaluate eligibility using online data sources, including social media profiles and credit history.
Therefore, when time is of the essence, fintech lenders are the quickest option. Still, it is important to first make sure that you are eligible for a personal loan according to a particular lender’s standards. In this case, it makes sense to only contact the lender whose eligibility criteria a borrower can meet.
Knowledge of the approval standards
When it comes to eligibility standards, lenders consider the applicant’s current income, current employer, repayment ability, creditworthiness, and monthly payment obligations, among other things. The credit rating is crucial here, as a higher score can improve the chances of admission with more favorable conditions.
Terms and conditions and loan amount
Assuming the prospective applicant is eligible for a loan from both legacy and digital lenders, the next step is to compare their terms, as well as interest rates and fees. It is important to compare the full range of fees and other terms, not just the total interest rate.
The next essential element is the loan amount available. It depends on the lender’s risk tolerance and internal guidelines. While banks can grant personal loans of up to INR 50 lakh, new age lenders are only allowed to grant up to INR 5 lakh. But there may be exceptions to the above.
Verifying the credibility of the lender
Although borrowers typically don’t care about the lender, it makes sense to check the company’s credibility before borrowing to avoid any unwanted complications later. Credibility is not an issue with banks. However, with digital lenders, it is important to check the Reserve Bank of India (RBI) registration status and the lender’s disclosure standards. The reference to the ratings of other users and the rating in the Google Play Store or Apple App Store can also be helpful.
Both positive and negative comments can tell whether a lender was honest and straightforward with customers. One should consider whether the lender will contact borrowers if they have problems and try to resolve them. negatively, you should rethink the credit agency.
Secured gold loan
When applying for a personal loan, keep both your short-term and long-term interests in mind. If an unsecured personal loan solves a short-term problem but creates long-term problems, it is wise to consider another funding method, such as a secured gold loan, to help solve the current problem.
Of course, secured gold loans have their advantages and disadvantages, such as their short term. Hence, people need to carefully weigh all of their options before making the best choice in their current circumstances.
Check the fine print carefully
For this reason, borrowers are always advised to read and reread the fine print. Most people make the mistake of ignoring the terms and conditions completely or just rashly checking them. They later regret it when they cannot fully meet strict repayment conditions.
So take the time to understand the terms. Ask questions if you are unsure about certain standards. Review late payment, prepayment, and loan foreclosure charges. Only when you have clarity on these points should you proceed to sign on the dashed line.
Clear your doubts
Fortunately, all the terms and conditions are posted on their website by organized lenders. So you don’t have to rush to read these standards at the last minute. After reading the terms beforehand, write down your doubts and clarify them before accepting the personal loan.
Creditworthiness and prepayment
Still, customers need to meet minimum KYC requirements and maintain healthy creditworthiness. The latter will help borrowers get loans at a slightly lower interest rate. A credit score greater than 750 is considered good by all lenders.
Borrowers with a credit score less than 750 may still be eligible for personal loans from fintech companies. But interest rates will be higher as lenders have to compensate for the greater risk of such unsecured loans.