How To Select The Best Personal Loan

Interest Rate

Like in all other loans, the component that bothers one most in a personal loan is the interest rate. Personal loans are known for their high interest rates, falling in the range of 14% to 25% per annum. So it goes without saying that the lower the interest rate, the better it is for you.

You can choose from among three types of rates – Fixed, Floating and Flat. Of these, flat rate can prove costly in the long run as your EMI remains the same over the entire life of the loan. Reducing balance method is used to calculate other two rates. In this method, interest is computed only on the outstanding loan amount.

Take into account different rates offered by different lenders. The lending institutions also differ in terms and conditions, so if you read the fine print carefully and compare the rates you can save 0.5-1 per cent in interest. Good rapport with a bank and good credit history can further lower your interest rates.

Loan Amount

A lower loan amount means smaller loan tenure and lower EMIs. The loan amount sanctioned to you depends upon your repayment capacity, thus it is important for you to first calculate EMIs you can afford to pay every month. This in turn means you should go for lowest EMIs. Keeping loan amount low minimises the risk of defaulting on your monthly repayments.

Repayment Period

Generally, personal loans are offered for 1 year to 5 years. But there are some lending institutions that stretch this period to up to 7 years. So if your loan amount is big, it will be ideal for you to go for a longer tenure. With a longer duration, your EMIs will get spread over a longer length, thus reducing your monthly outgo. But it has a flip side – Opting for a longer loan terms lowers your EMIs instantly but turns out to be expensive in the long run.

Fees/Charges

While selecting a personal loan, scrutinize all the other charges and costs associated with the loan. There are various charges like processing fees, prepayment charges, late payment charges, service tax that should be worked out before finalising the loan. If possible look for a loan with zero processing fees and zero prepayment charges. If that is not available, bargain hard to get a lower cost from a lender. Remember, despite a low interest rate your overall cost can be raised due to high charges.