At some crucial points of life when we require urgent financial help, personal loans prove to be extremely helpful. Since they are collateral-free and easy to avail, many people rely on this unsecured form of financing. However, securing a personal loan is easy, still, people find it difficult to secure such loans. If you are also one of them who want to apply for a personal loan and doesn’t know the fact how a personal loan works or what a lender considers before sanctioning a loan, then read this blog.
Table of Contents
1. Credit profile
Since a personal loan is an unsecured form of a loan, lenders carefully examine your credit report which includes all the details of your credit history, especially credit cards and loans. While applicants who have a credit score of 750 or more can get a personal loan easily. However, the applicants who fall short of the desired credit score may not or may get a personal loan at a higher rate of interest. In the case of secured loans (car loans, home loans, loans against property), collateral plays a crucial role in getting a loan. In the same way, the credit score plays a vital role while getting a personal loan. A credit score shows your credibility as a borrower and helps a lender to assess the risk involved in lending.
Assume you apply for ICICI Bank personal loan and if you have a strong credit score, then you can avail a personal loan up to Rs 20 lakh.
Therefore, it’s necessary to keep a track of your credit score at periodic intervals because it helps you build a good credit score when you detect bad credit behaviour. Besides that, also keep in mind that try to avoid applying with multiple lenders as every credit enquiry gets recorded in your credit report and the lender doubts your credibility.
2. Rate of interest
The interest rate for the personal loan is determined on several factors like your creditworthiness, income, age, employer, credit score, etc. Therefore, it may vary between 11% and 24%. For example, ICICI Bank personal loan interest rate ranges between 11.25% p. a. and 22% p. a. So, being a smart borrower, you must compare the interest rate of various lenders then choose a lender at your convenience. To compare the interest rate of various lenders, you need not make the enquiry with the lender as you can check this online at a credible fin-tech platform.
3. Loan tenure
Generally, the repayment tenure varies between 1 to 5 years. However, a few of them allow a longer tenure up to 6 years. But as a borrower, you must know, lower tenure means higher loan EMI and lower interest. On the other hand, longer tenure means lower loan EMI and higher interest. Thus, you must keep your EMI at a manageable level without making a burden on your finances. In other words, if you can repay the loan faster, you must choose a shorter tenure. But always remember that shorter tenure can imbalance your debt-to-income ratio and your application may be rejected. To choose an optimum loan tenure, you can also take the benefit of the EMI calculator. Suppose you want to take a personal loan from ICICI Bank, then you can use ICICI personal loan EMI calculator. This simple tool tells you about your future EMIs, total interest that you will pay during the loan tenure.
4. Processing fee
Processing fee refers to the expenses borne by the lender when they process your personal loan application, which includes administrative charges, cost of credit checks, etc. However, the lender doesn’t pay the processing fee himself, instead; he asks you to pay it at the time of loan disbursal. The processing fee usually ranges between 0.5% and 3% of the loan amount, while some lenders may charge a flat fee. Assume you take a personal loan from ICICI Bank, the bank will charge a processing fee of 2.25% of the loan amount. So, before selecting a lender, ensure to check the processing fee because in case of big-ticket loans it may be a whopping amount.
5. Prepayment and foreclosure charges
A borrower closes its loan before the tenure. When a borrower does that, it will require paying a prepayment penalty or fee to the lender. Generally, prepayment/foreclosure charges range between nil and 5% of the outstanding loan amount. For instance, ICICI Bank charges a 5% prepayment fee on the outstanding loan amount. However, some lenders allow this to happen only after a certain period. By choosing a prepayment plan, you can save a lot of interest during the tenure. So, if you are planning to prepay the loan, choose a lender who has minimal prepayment or foreclosure penalty.
In case you find anything confusing, you can contact customer care to get a better idea of the charges, fee, eligibility criteria, and documentation. To connect with a customer, you need not pay anything as most of them have toll-free numbers. Suppose, to connect with ICICI Bank customer care number, you will need to dial these toll-free numbers given below.
1860 120 7777,
1800 103 8181,
1860 120 6699
Conclusion
Before applying for a personal loan, a borrower should consider the various factors like challenges that a lender faces while judging your candidature. From applying for a loan to paying it off, you must know about the whole process. If you take care of the credit score, then you will get lower interest offers from lenders that will help you save a sizeable amount as interest. Always choose a personal loan with flexible tenure and offer low prepayment charges that save a whopping amount upfront.
