Do's and Don'ts for Getting a Personal Loan

MUMBAI: Personal loans enable both salaried and self-employed individuals to meet their short to medium term financial obligations without having to furnish any collateral or security. As individuals looking for a personal loan have several options to choose from, they may have a difficult time in selecting the right lender for their personal loan. The chances of availing approval for personal loans may increase or decrease depending on the loan applicants’ financial behaviour. Moreover, these actions may also end up having long-term consequences on the financial health of the prospective borrowers. Hence, it is important for prospective borrowers to understand more about personal loans before they opt for this unsecured credit instrument. Here are some do’s and don’ts for personal loan applicants as well as for existing personal loan borrowers:

Do’s for Availing Personal Loans

Compare the interest rates offered by various personal loan lenders

The interest rates offered on personal loans usually start from 10.49% p.a., with some public sector banks offering lower rates of interest on their personal loan schemes. Prospective borrowers should first check the personal loan interest rates with banks and non-banking financial companies (NBFC) with whom they share a deposit, credit card or lending relationship. Then they should visit online financial marketplaces to compare the interest rates on personal loans offered by other lenders based on their credit profile. These financial marketplaces also allow loan applicants to apply for personal loan online with their partner lenders.

Select your loan tenure after factoring your EMI affordability

The loan tenures offered by most personal loan lenders extend up to 5 years, with some lenders also offering tenures of up to 7 years. Opting for longer loan tenures will lower the EMI amount but increase the overall interest cost while shorter repayment tenures will reduce the total interest costs but increase the EMI. Thus, personal loan applicants should use the online personal loan EMI calculator to find their optimum loan tenures and EMI based on their finances. Loan applicants should also account for their unavoidable monthly expenditures and monthly contribution towards their crucial financial goals while selecting their optimal EMIs.  

Keep your EMI/NMI Ratio within 50-55%

EMI/NMI ratio is the sum total of an individual’s total EMI obligations (including the EMI of their proposed personal loan) as a proportion of their net monthly income (NMI). Lenders offering personal loans usually consider this factor as an important indicator of their repayment capacity. Lenders usually prefer lending to loan applicants with total EMIs within the limit of 50-55% of their net monthly income. Those exceeding this limit have lower chances of personal loan approval. Thus, loan applicants can use the Personal Loan EMI Calculator to find out whether their EMI/NMI ratio, after factoring in the EMI of the proposed personal loan, is within the desired range. Applicants exceeding the above mentioned limit can select longer loan tenures to increase their chances of loan approval.

Check the total cost of availing a personal loan

Although interest rates play a vital role in deciding the overall cost of opting for a personal loan, there are other fees and charges associated with a personal loan which can inflate the overall cost. As a prospective borrower, you should be aware of the processing fees, prepayment charges and other expenses levied by lenders under their personal loan schemes and opt for the lender with the lowest total cost for availing a personal loan after factoring their interest rates, processing fees and other charges.

Check the eligibility criteria

Although every lender offering personal loan has their own eligibility conditions, lenders usually offer personal loans on the basis of their loan applicants’ income, credit scores, existing financial obligations, employment profile, etc. Therefore, loan applicants should check if they meet the eligibility criteria set by a particular lender before they apply for a personal loan. Failure to meet the eligibility conditions may result in loan rejection and negatively impact their credit score. Instead, loan applicants should visit online financial marketplaces, which provides loan offers to the applicants on the basis of their credit profile and loan eligibility matrix set by the individual lenders.

Don’ts for Availing Personal Loans

Don’t ignore your credit score

Credit scores are a numerical indicator of an individual’s creditworthiness. Lenders use this score to determine their applicants’ repayment capacity. Applicants with lower scores may be denied loan approval or they may get loan sanction at higher interest rates. Thus, loan applicants should regularly track their credit scores by fetching their credit report and take corrective steps to improve their credit scores. Fetching their credit report will allow applicants to check for any clerical errors or incorrect information present in the report and rectify those errors. A rectified credit report will increase the loan applicant’s credit score and thereby, improve their personal loan eligibility.

Don’t apply with multiple lenders within a short duration

Whenever you apply for a new personal loan, the lender fetches your credit report from the credit bureaus in order to assess your creditworthiness. Credit bureaus consider such credit report requests from lenders as hard inquiries, which leads the bureau to reduce your credit score by a few points. Therefore, multiple such inquiries within a short span of time will sharply reduce your credit score, thus reducing your chances of availing personal loans.

Loan applicants should instead visit online financial marketplaces if they want to make multiple such loan inquiries. Such credit report requests from financial marketplaces are considered as soft inquiries, which do not reduce your credit scores.

Don’t skip EMI payments

Lenders usually charge late payment fees if you miss your EMI repayment deadline. Although the lender might offer an extension under certain circumstances, borrowers usually have to pay the penal interest rates on failure to repay their EMI. As the repayment history of an individual receives the highest weightage while calculating their credit score, non-payment of EMIs by their due date may also end up in reducing their credit scores, which in turn would reduce their future loan and credit card eligibility. Thus, personal loan borrowers should always try to pay their EMIs by their due date.

Don’t borrow from unrecognised lenders    

Loan applicants should exercise caution while checking personal loan offers from multiple lenders. There are many unrecognised platforms which may promise lower interest rates or other favourable conditions on their personal loans. However, such unscrupulous lenders may steal your personal information or they may have other hidden charges which will end up ballooning your borrowing costs. Therefore, prospective borrowers should always apply for personal loans with lenders recognised by the RBI having good customer reviews and reliable lending history.