9 Points to Consider Before Availing Personal Loans Personal loan is a preferred credit option for consumers having urgent financial requirements as it comes with no end usage restriction, zero collateral, minimal documentation and faster disbursal. However, selecting the right personal loan scheme from among multiple loan offers can be a challenging task. Hence, prospective borrowers should consider the following points before making the final personal loan application: Compare the interest rates of multiple personal loan lenders Private sector lenders usually offer personal loans at interest rates starting from 10.49% p.a., with some public sector banks offering lower rates on their personal loan schemes. Prospective personal loan applicants should first check the interest rates offered by their existing lenders with whom they have deposit, lending or credit card relationships. They can use the interest rates and other features offered by their existing lender(s) as a benchmark to compare with the personal loans offered by other lenders. Applicants can also visit online financial marketplaces to compare personal loan offers of multiple lenders, based on their credit profile, before applying for personal loans. Choose loan tenures post-factoring your EMI affordability Lenders usually offer personal loans with tenures of up to 5 years, with some lenders also offering longer repayment periods. Opting for longer loan tenures will reduce the EMI amount but increase the overall interest costs and vice versa. Thus, personal loan applicants should use online personal loan EMI calculators to find their optimal EMIs and loan tenures. Applicants should also consider their unavoidable monthly expenses and monthly contributions towards crucial financial goals while deciding the optimal EMIs for their personal loans. Don’t ignore your credit score Lenders consider the credit scores of their loan applicants as a primary filter to evaluate their creditworthiness. Lenders usually approve personal loan applications of individuals having credit scores of 750 and above. Those having lower credit scores may have their personal loan applications rejected or they may be charged higher interest rates. Therefore, those planning to avail of personal loans should fetch their credit reports from credit bureaus at regular intervals. This will allow them to take corrective steps to improve their credit scores before applying for the loan. Prior fetching of credit reports will also allow prospective applicants to check for any clerical errors or incorrect information present in the report and for any fraudulent credit activity made in the applicants’ name. Such instances, if any, should be reported to both the lender and the concerned credit bureau for rectification. Rectified credit reports will increase your credit scores and thereby, improve your eligibility for availing personal loans. Limit your EMI/NMI Ratio to within 50-55% EMI/NMI ratio is the total of your monthly loan repayment obligations (including your proposed personal loan’s EMI) as a proportion of your net monthly income (NMI). Lenders usually consider this ratio as an indicator of your repayment capacity. Banks/NBFCs usually prefer lending to personal loan applicants whose total EMI is restricted to 50-55% of their net monthly income. Those exceeding this limit have lower chances of getting their loans approved. Applicants exceeding the aforesaid limit can select longer loan tenures and/or opt for lower loan amounts to increase their chances of securing loan approval. Check the total cost of availing of personal loans Apart from interest rates, prospective applicants should also consider other charges like processing fees, part-prepayment/foreclosure charges, late payment fees, etc., which can inflate the overall cost of availing personal loans. You should be aware of the personal loan fees levied by multiple lenders and opt for the lender charging the lowest total costs after factoring in their interest rates, processing fees and other charges. Check the eligibility criteria for availing of personal loans Every bank/NBFC has its eligibility matrix for evaluating personal loan applications. However, lenders usually assess the personal loan applications of prospective borrowers based on their income, credit scores, employment profile, repayment capacity, etc. Therefore, applicants should check whether they fulfil the eligibility criteria set by a particular bank/NBFC before applying for its personal loan scheme. Failure to meet the eligibility criteria can lead to loan rejection, which may negatively impact your credit score. Instead, loan applicants can visit online financial marketplaces to check the personal loan offers of multiple lenders, based on their credit profile and the loan eligibility conditions set by individual lenders, before making the final loan application. Don’t apply with multiple lenders within a short duration When a lender receives a personal loan application, it fetches the applicant’s credit report from credit bureaus to determine his creditworthiness. Credit bureaus consider such lender-initiated credit report requests as hard inquiries. The bureaus deduct a few points from your credit score for every such hard inquiry. Therefore, making multiple such inquiries within a short period may sharply reduce your credit scores, thus reducing your chances of availing of personal loans or other credit options in future. Instead, you should visit online financial marketplaces to compare personal loan schemes of multiple lenders before applying for a loan. Credit report requests raised from online financial marketplaces are considered soft inquiries, which have no adverse impact on your credit scores. Avoid Defaulting on your EMI payments As your repayment history receives the highest weightage while calculating your credit score, failure to pay your EMIs by the due date would negatively impact your credit score. This, in turn, would reduce your future loan and credit card eligibility. Hence, personal loan applicants should always seek to repay the EMIs of their existing loans by their due dates. Avoid borrowing from unrecognised lenders Many unrecognised platforms may promise lower interest rates or other favourable terms on their loan schemes. However, such lenders may steal your personal information and/or levy other hidden charges that will exponentially increase your borrowing costs. Hence, prospective borrowers should always avail of personal loans from lenders recognised by the RBI as having a reliable lending history and favourable customer reviews.