14 things to know before taking out an unsecured personal loan – Forbes Advisor INDIA


There are many occasions where a person needs short term funds. These could include a child’s college education, wedding expenses, medical emergencies, and other scenarios. In such situations, a personal loan is the best and quickest recourse.

Unsurprisingly, a survey from a consumer finance company finds that medical emergencies account for 28% of personal loans while 25% went to family needs such as wedding expenses, children’s education and home renovations. . Almost 77% of the respondents opted for personal loans in such cases.

Advantages of Personal Loans

Aside from faster disbursement, personal loans have another advantage over other loans: they can be used for a variety of purposes with no questions asked. For other loans, the end goal is well defined, such as home, car, two-wheeler, gold or education loans, which limits the use.

Pre-approved offers

Being unsecured loans, despite the somewhat higher interest rates, people prefer personal loans as they are advanced without unnecessary hassle. Also, when it comes to offering personal loans to their trusted customers, many lenders offer pre-approved offers.

Typically, these are granted to borrowers with salary accounts. Periodically, lenders may send messages to these customers about pre-approved personal loan offers. Although these are readily available, financial experts advise customers to take out such loans only when needed and not because of their easy availability.

Amount and schedule

Once the requirement is established, potential borrowers can check their lender’s mobile banking for relevant loan offers. The borrower must be clear on two elements before proceeding. First, the amount of funds needed. Two, the period for which the loan is needed.

Significance of mandate

The other key point is to decide on the length of your loan. Personal loans are granted for terms ranging from one to five years. Although a shorter term is preferable since you will pay less interest, the EMI will be relatively higher. So decide the term based on repayment ability and convenience.

If you only need money in the short term and can repay with a higher EMI, a personal loan via a lower term is better. If in doubt, it is safer to choose a longer duration.

Compare interest rates

Thereafter, the borrower is advised to compare the interest rates offered by different lenders. Although a customer’s credit score is the same, different lenders may offer varying rates to the same person. Indeed, each lender, whether traditional or new, follows a personalized risk assessment.

Personal loans are generally granted to preferred customers at interest rates ranging from 15% to 36% per annum. Lenders will likely charge a higher rate if the perceived risks are higher. Risk assessment is based on credit rating, job profile, employer reputation, payment history, relationship with 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 in the event of default.

Decide on the lender

Additionally, depending on the urgency, borrowers could opt for either a personal loan from a bank or a fintech lender. Typically, banks can take a week or more to approve and disburse a personal loan. On the other hand, digital lenders can do the same in minutes, if all know-your-customer (KYC) documents are clear.

The reason banks and other traditional lenders take longer to approve loans is that they have heavy documentation requirements and the risk assessment process usually also involves a lot of manual steps. On the other hand, fintech lenders focus on speed and convenience and assess eligibility using online data sources, including social media profiles and credit history details.

Therefore, if time is of the essence, fintech lenders are the quickest option. Nevertheless, it is important to first ensure that one is eligible for a personal loan by the standards of a specific lender. In this case, it makes sense to approach only the lender whose eligibility criteria can be met by a borrower.

Know the eligibility standards

Regarding eligibility standards, lenders will take into account, among other things, the applicant’s current income, current employer, repayment capacity, credit rating and monthly payment obligations. Here, the credit score is crucial as a higher score can improve the chances of approval as well as more favorable terms.

Terms and conditions and loan amount

Assuming the potential candidate is eligible for a loan from legacy and digital lenders, the next step is to undertake a comparison of their terms and conditions as well as interest and fees. It is important to compare the full range of fees and other terms and not just the overall interest rate.

The next essential element is the loan amount available. This will depend on the lender’s risk appetite and internal policies. While banks can give personal loans up to INR 50 lakh, new-age lenders can only go up to INR 5 lakh. But there may be exceptions to the above.

Checking the credibility of the lender

Although borrowers generally do not care about the lender, it is a good idea 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 other users’ reviews and rating on Google Play Store or Apple App Store can also be helpful.

Positive and negative feedback can shed light on whether a lender has had honest and direct dealings with customers. Consider whether the lender engages with borrowers when they have problems and attempts to resolve them. negatively, you should reconsider the lender.

Secured gold loan

Keep your short-term and long-term interests in mind when applying for a personal loan. If an unsecured personal loan solves a short-term problem but creates long-term problems, it is advisable to consider another mode of financing such as a secured gold loan to solve the current problem.

Of course, secured gold loans have their pros and cons, such as their short repayment term. People should therefore carefully weigh all their options before making the best choice for their current situation.

Check the fine print carefully

For this reason, borrowers are always advised to read and re-read the fine print. Most people make the mistake of completely ignoring the terms and conditions or only checking them in a hurry. Later, they regret it when they cannot fully meet the strict repayment terms.

So take your time to understand the terms. Ask questions if you are still unsure of the specific standards. Double-check the loan’s late payment, prepayment, and foreclosure fees. Only after clarifying these points should you proceed to the signature on the dotted line.

Clarify your doubts

Fortunately, all the terms and conditions are published by the organized lenders on their website. So you don’t have to rush through these standards at the last minute. Once you have read the conditions beforehand, write down your doubts and clarify them before accepting the personal loan.

Credit scores and prepayment

Nonetheless, customers must meet minimum KYC requirements and maintain a healthy credit score. The latter will help borrowers receive loans at a slightly lower interest rate. A credit score above 750 is considered good by all lenders.

Borrowers with credit scores below 750 could still be eligible for personal loans from fintech companies. But the interest rates will be higher since the lenders have to compensate for the higher risk of these unsecured loans.


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