It is common these days to receive an SMS or advertisement, at least once daily, from a loan provider promising instant personal loan at an attractive interest rate. The rates quoted are usually at a lower band to make it attractive for consumers, but mostly that is not what you get at the end of application process. Regardless of high or low interest rate is, while availing personal loans there are other important factors that should be looked at.

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Processing fee: Generally, consumers ignore the processing fee, which is 1-2% of the loan amount. Some lenders charge a flat fee. Since the processing fee differs from one bank to another, you should compare this cost to select a lender with lower processing fees.

Pre-closure or pre-payment terms: We tend to borrow in order fund our emergency needs occurring at eleventh hour. The intention is to pay this borrowed money before our liquidity position improves, and subsequently save on interest cost. You should consider the pre-closure condition and the penalty cost and choose a lender with lower pre-payment penalty.

Late payment fee: Sometimes we skip or make late Equated Monthly Installment (EMI) payment due to cash crunch. Making a late EMI payment also attracts unnecessary penalty cost. Hence, if you expect a shortage of cash flows to service EMI at some point, you also need to check and consider the penalty rate.

Loan approval process: The process involved in personal loan will vary from one lender to another. However, as we take a personal loan to address immediate requirement, make sure that the approval process is be quick and easy.

Borrow based on you needs: Personal loans charge higher interest rate as compared to other loans. So if your short-term need is Rs 2.50 lakh then borrow only that much. Although you will be eligible to borrow more due to your strong credit position, it doesn’t make sense to pay unnecessary interest cost.

Smart loan options: Few lenders offer additional schemes on personal loan, such as the option of part or full payback without any charges. Explore and compare all the additional benefits available with personal loans and accordingly chose the lender. However, don’t get lured with add-on offers that will increase your EMI cost. One classic case is clubbing accidental insurance plan without any premium cost. In such cases insurance premium usually gets added with EMI.

The most important element to keep in mind is to borrow only when it is required, on an emergency basis, and not on whims and fancies.

By: Dinesh Rohira

(The writer is founder and CEO, 5nance.com)
Source: DNA Money