Personal Loan: How to choose a loan that aligns with your needs

If you are short of funds and do not have a clarity as to where to raise the loan from – you can rely on what is known as a 'personal loan'. This is an unsecured loan offered by banks and financial institutions to meet the immediate needs of people.

In case you are wondering as to why is a loan referred to as 'personal loan', this is because it is given for the purposes that are very personal in nature. Let us suppose, you want to get the house renovated, or want to go on a vacation, or you are contemplating buying a diamond ring for your loved one, or have to meet a financial exigency which is quite personal in nature, then you can explore the option of raising a personal loan.

It is worth mentioning here that most banks and financial institutions offer these unsecured advances carrying high interest rates.

However, before you decide to take a personal loan, it is advisable to be aware of the key features of personal loan.

Personal Loan: Key Features

1. High interest rate: Interest rate on personal loan is typically higher than most other loans. This is because personal loan is unsecured, so it carries a higher risk for the lender.

2. Fixed rate of interest: The rate of interest on personal loan is fixed, so EMI remains the same regardless of increase or decrease in interest rates in the market.

3. Flexible tenure: The tenure of loan repayment is usually flexible. One can decide to repay the loan in one year or five depending on the ability to repay.

4. Unsecured loan: Personal loan is unsecured. This means you don't need a security to raise the loan. This is, in fact, the key reason for higher interest rates charged on these loans.

5. Undefined purpose: You can raise a personal loan for any purpose, such as renovating a house or buying an expensive jewellery.

In order to raise a personal loan, you need to submit a number of documents to the lender which are salary slips for the past three months, Form 26AS, identity proof document such as Aadhaar and PAN card. The lender may ask for more documents in order to satisfy itself of your ability to repay the loan on time.

Importantly, you need to have a high credit score, also known as CIBIL score, to be able to repay the loan. A good score that can help you fetch personal loan is 720 and above.

Key points to keep in mind

If you are all set to raise a personal loan, you need to be careful about a slew of things. Here, we list out the key factors that you should be mindful about:

1. Compare the interest rates: Prior to raising a personal loan, you should compare interest rates charged by different lenders. Try as much as possible to pick the bank that charges a low interest rate.

2. Investing discipline: It is vital to note that raising a personal loan should be the last resort and not the first option. In case you fall short of money, try to first save for sometime to meet your need. If you are still unable to fulfil your need or if the time duration is too short for saving save the money, only then you should choose the option of raising a personal loan.

3. Processing fee: Most banks levy a fee for processing the loan. You should be aware of this, since it reduces the amount you receive.

4. Prepayment penalty: If you have a plan to prepay the loan, you should check for any penalties that might apply for early repayment.

5. Late payment fees: You should also be aware of the costs that kick in when you miss your instalment.

6. Tenure Vs interest: A long tenure loan typically means lower monthly payments, but it also implies you will pay more interest over the tenure of loan. Likewise, a short duration loan will have higher monthly payments, but will help you save on interest.

7. Bank's reputation: You should check the reputation of bank and its customer service. You should avoid choosing bank that has poor customer reviews or predatory practices.