14 Things To Know Before Taking An Unsecured Personal loan – Fintech Zoom Advisor INDIA
There are many occasions when a person needs funds at short notice. These could include a child’s higher education, marriage expenses, medical emergencies and other scenarios. In such situations, a personal loan is the best and quickest recourse.
Not surprisingly, a consumer finance company’s survey reveals that medical emergencies account for 28% of personal loans while 25% went towards family needs such as wedding expenses, children’s education and home renovation. Almost 77% of respondents opted for personal loans in such cases.
Benefits of Personal Loans
Faster disbursal apart, personal loans have another advantage over other loans – they can be used for varied purposes with no questions asked. Where other loans are concerned, the end purpose is well defined such as for home, car, two-wheeler, gold or educational loans, thereby restricting the use.
Being unsecured loans, despite the somewhat higher interest rates, people prefer personal loans as these are advanced without undue hassles. Besides, when it comes to offering personal loans to their trusted clients, many lenders give pre-approved offers.
Typically, these are given to borrowers having salary accounts. Periodically, lenders may message such customers about pre-approved personal loan offers. Though these are easily available, financial experts advise customers to take such loans only if required and not because of their easy availability.
Amount and Timing
Once the requirement is established, prospective borrowers can check their lender’s mobile banking facility for relevant loan offers. The borrower must be clear about two elements before proceeding. First, the amount of funds required. Two, the period for which the loan is needed.
Importance of the Tenure
The other key point is to decide on the tenure of your loan. Personal loans are provided on tenures ranging between one and five years. While a shorter tenure is better since you will pay less interest, the EMI will be relatively higher. So decide the tenure as per repayment capacity and convenience.
If you only need money for the short term and can repay with a higher EMI, a personal loan via a lower tenure is preferable. In case of doubt, it is safer to choose a longer tenure.
Compare Interest Rates
Thereafter, the borrower is advised to compare the interest rates offered by different lenders. While a customer’s credit rating will be the same, different lenders may offer varying rates to the same person. This is because each lender, whether traditional or new age, follows individual customized risk evaluation.
Personal loans are typically advanced to prime customers at interest rates varying from 15% to 36% per annum. Lenders will likely charge a higher rate if the perceived risks are higher. The risk evaluation is based on the credit score, job profile, employer’s 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 collateral such as a fixed deposit certificate, vehicle papers, gold, etc. Secured personal loans are easier to obtain since the bank can retain the collateral if you default.
Deciding on the Lender
Moreover, depending on urgency, borrowers could opt either for a personal loan from a bank or a fintech lender. Generally, banks may take a week or more to approve and disburse a personal loan. On the other hand, digital lenders can do the same within minutes, if all the know your customer (KYC) documents are clear.
The reason why banks and other legacy lenders take longer to approve loans is that they have heavy documentation requirements and the risk evaluation process typically also involves many manual steps. On the other hand, fintech lenders focus on speed and convenience and assess eligibility by using online data sources, including social media profiles and credit history details.
Therefore, if time is of essence, fintech lenders are the fastest option. Nonetheless, it’s important to first ensure one is eligible for a personal loan as per the norms of a specific lender. In which case, it makes sense only to apply to the lender whose eligibility criteria a borrower can fulfil.
Knowing the Eligibility Norms
Coming to eligibility norms, among other things, lenders will consider an applicant’s present income, current employer, repayment capacity, credit score and monthly payment obligations. Here, the credit score is crucial since a higher score can improve the chances of approval along with more favourable terms.
Terms and Conditions and loan Amount
Presuming the prospective applicant is eligible for a loan from both legacy and digital lenders, the next step is to undertake a comparison in their terms and conditions as well as interest and fees. It is important to compare the entire gamut of charges and other terms and not just the headline interest rate.
The next essential element is the loan amount available. This will be contingent on the lender’s risk appetite and internal policies. While banks can provide personal loans of up to INR 50 lakh, new-age lenders may only go up to INR 5 lakh. But there may be exceptions to the above.
Checking the Lender’s Credibility
Although borrowers usually don’t bother about the lender, it’s sensible to check the credibility of the company before borrowing to avoid unwanted complications later. With banks, credibility is not an issue. However, with digital lenders, it is important to check the Reserve Bank of India (RBI) registration status and disclosure standards of the lender. Referring to the reviews of other users and the rating on the Google Play store or Apple App store can also be useful.
Both positive and negative comments can shed some light on whether a lender has had honest and straightforward dealings with customers. One should consider whether the lender is engaging with borrowers when they have issues and attempting to solve them. negatively, you should reconsider the lending agency.
Secured Gold loan
Keep both your short-term and long-term interests in mind while applying for a personal loan. If an unsecured personal loan resolves a short-term issue but creates long-term problems, it’s advisable to consider another funding mode such as a secured gold loan to solve the present problem.
Of course, secured gold loans come with their pros and cons, such as their short repayment tenure. So people must weigh all their options carefully before proceeding with the best choice under their current circumstances.
Check the Fineprint Closely
For this reason, borrowers are always advised to read and reread the fine print. Most people make the mistake of totally ignoring the terms and conditions or only check them hastily. Later, they regret this when they cannot fully meet any stringent repayment conditions.
So take your time in understanding the terms. Do ask questions if you are still unsure about specific norms. Double-check about the charges for late payment, prepayment and foreclosure of the loan. Only after you have clarity on these points should you proceed with signing on the dotted line.
Clarify Your Doubts
Fortunately, all the terms and conditions are published by organised lenders on their website. So you do not have to read these norms in a hurry at the last minute. Once you have read the terms in advance, note down your doubts and clarify these before accepting the personal loan.
Credit Scores and Prepayment
Nevertheless, customers have to meet the minimum KYC requirements and maintain a healthy credit score. The latter will help borrowers receive loans at a somewhat lower interest rate. A credit score upwards of 750 is considered good by all lenders.
Borrowers with credit scores lower than 750 might still be eligible for personal loans from fintech firms. But the interest rates will be higher since lenders have to offset the greater risk of such unsecured loans.