Banks across India give loans for specific reasons. For example, Home loans can be used for buying homes, car loans can be used to buy cars, education loans can be used for education purpose etc. However, banks and NBFC’s ( Non-banking Financial Institutions) soon realized that sometimes customers with good credit history (& preferably working in a job) can need access to money for financial need which does not fall into of existing categories like home loan/ car loan etc. So a working individual might need quick access to money for things like home renovation, family medical emergency, organize marriage parties, be planning vacation, paying for sons/ daughters schools admission fees and hence banks started offering Personal loans.
So the biggest differentiator between personal loans and other existing loans products (like home loan/car loan etc) is that you can spend the personal loan amount on any activity. The personal loan once disbursed needs to be repaid every month via a EMI ( equated monthly installment ) which is taken directly from your salary bank account.
Factors deciding Personal Loans
Now that we have a good understanding of what’s the personal loan, let us look at the various factors which should be kept in mind while applying for personal loans.
Personal Loan Interest rate
When we take home or car loan, the bank owns the underlying asset ( thing for which the loan was taken). For example, if you take a home loan to buy a new apartment, the bank would keep the original home registry documents, so that in case the customer does not pay the EMI, the bank can take possession of the home to recover outstanding loan. With these loans, the bank’s risk is minimized and hence they are known as “Secured loans” for banks and hence interest rates is normally lower.
Since personal loans are unsecured loans( ie banks and NBFC’s cannot sell an asset to recover the loan) these loans have much higher interest rates. Hence the most important factor while deciding which financial institutions should be used is to opt for one which offers the lowest interest rate.
The interest rates normally vary between 11.29% to 20% per annum and is decided based on customer’s financial profile.
Personal Loan Processing charges
Processing Charges is a fee which needs to be paid for applying for personal loan. The processing charges normally vary between 0% to 2.5% of loan amounts. The processing charge normally needs to be paid only when the loan is approved, however, we have seen cases where processing fees need to be paid in advance and is non-refundable.
Personal Loan Prepayment charges (ForeClosure Charges)
Personal loans are generally taken in times of emergency when the cash cannot be arranged quickly and hence at times customers wish to repay the loan once the funds are arranged from an alternative source( like family members or friends or annual bonus etc). While some financial companies allow its customers repay the loan sooner, we have seen that they apply a prepayment charge ( to account for the loss of interest income on your loan). The amount of prepayment charge generally varies between 0% to 6% of outstanding principal. It’s also worth noting that some companies, do not allow prepayment until 6 or 12 months (or more) of EMI have been paid the customer.
We would recommend that you pay close attention to this factor while deciding which personal loan, if you plan on pre-paying the personal loan sooner than loan end date.
Personal Loan Processing timelines
While most financial companies are pretty fast in processing cases of personal loans because of applicant’s needs to money as soon as possible, we have seen that companies process the loans faster than others.
Personal Loan EMI Bounce Charges
When you apply for Personal loans, the financial companies giving the loans either take PDC ( Post dated Checks ) or Automated clearing approval (direct bank payment) so that EMI can be deducted automatically from your bank account.
Now if because of any reason, you are not able to pay the monthly EMI you might need to pay an additional Penalty charges, PDC or Automated clearing approval bouncing charges, late interest charges, and other miscellaneous charges.
We would strongly recommend that you always have enough money in your account so that you never have to pay EMI Bounce charges because they are very high ( when you include all charges).
After analyzing the factors above, we have come up with a list of best personal loans in India.
What has your experience been about personal loan, share your experience in the comments section.