Do’s and Don’ts for Availing Personal Loans

Many consumers are increasingly choosing personal loans to fulfil their urgent financial requirements. Personal loans have zero collateral requirement, no end-usage restrictions, minimal documentation and faster disbursal, thus making it a viable credit option for those having urgent fund requirements. However, choosing the right personal loan scheme from among multiple offers can be a challenging task. Therefore, prospective applicants should consider the following do’s and don’ts before making the final personal loan application:

Do’s for Availing Personal Loans

Compare personal loan interest rates of multiple lenders

Private sector lenders usually offer personal loans interest rates starting from 10.49% p.a., with some public sector banks offering lower interest rates on personal loans. Prospective applicants should first check the interest rates offered by existing personal loan lenders with whom they have deposit or lending relationships. They can then use the personal loan interest rates and other features offered by their existing lenders as a benchmark to compare with personal loan offers of other lenders.

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Personal loan applicants can also visit online financial marketplaces and/or check some of the best personal loan apps to compare the personal loan offers of various lenders, on the basis of their credit profile.

Choose tenures after factoring your EMI affordability

Lenders usually offer personal loan tenures of up to 5 years, with some banks/NBFCs offering longer repayment periods. Opting for longer tenures will reduce the EMI amount but increase the overall interest costs and vice versa. Therefore, personal loan applicants should use personal loan EMI calculators to know their optimal EMIs and loan tenures. Loan applicants should also consider their monthly contributions towards crucial financial goals and unavoidable monthly expenses while deciding their optimal personal loan EMIs.

Restrict your EMI/NMI Ratio to within 50-55%

EMI/NMI ratio is the total of your monthly debt obligations (including the EMI of your proposed personal loan) as a percentage of your net monthly income (NMI). Banks/NBFCs usually consider this ratio as an indicator of your repayment capacity. Lenders usually prefer lending to loan applicants whose total EMIs are within 50-55% of their net monthly income. Those exceeding this limit have lower chances of getting personal loan approval. Loan applicants exceeding the aforesaid limit can select longer tenures and/or choose lower loan amounts to improve their chances of securing personal loan approval.

Check personal loan eligibility criteria of multiple lenders

Every lender has its own loan eligibility matrix to evaluate personal loan applications. However, lenders usually evaluate personal loan applications on the basis of their loan applicants’ credit scores, income, employment profile, repayment capacity, etc. Hence, personal loan applicants should check whether they fulfil the eligibility criteria set by the lenders before making the loan application. 

Instead, loan applicants can visit online financial marketplaces and check personal loan offers of multiple banks/NBFCs, based on their credit profile and the eligibility conditions set by individual lenders, before applying for a personal loan.

Check total cost of availing personal loans

Apart from the interest rates, prospective applicants should look at the processing fees, prepayment charges, late payment fees, etc., as it can inflate the overall costs of availing personal loans. Prospective applicants should know the personal loan fees and charges levied by multiple banks/NBFCs and opt for a lender with the lowest total costs after considering their interest rates, processing fees and other charges.

Don’ts for Getting Personal Loans

Don’t ignore your credit scores

Bank/NBFCs consider their personal loan applicants’ credit scores as a primary filter to evaluate their creditworthiness. They usually approve personal loan applications of those having credit scores of 750 and above. Lenders may reject personal loan applications of those having lower credit scores or approve their higher interest rates. Therefore, individuals seeking personal loans should fetch their credit reports from the credit bureaus at regular intervals. Doing so will allow them to take corrective measures to improve their credit scores before making the loan application.

Prior fetching of credit reports will also allow them to check for errors or incorrect information present in the report and for any fraudulent credit activity made in the applicants’ name. Prospective applicants should report any such instances to the lender and the concerned credit bureau for correction. Rectified credit reports increase your credit scores and thereby, improve your personal loan eligibility.

Don’t apply with multiple personal loan lenders within short durations

Lenders fetch their personal loan applicants’ credit report from the credit bureaus to determine their creditworthiness. Such credit report requests made by lenders are considered as hard inquiries. Credit bureaus reduce your credit score by a few points for every hard inquiry. Hence, making multiple such inquiries within short durations may sharply reduce your credit scores, thereby reducing your chances of availing personal loans or other credit options in the future.

Instead, those seeking personal loans should visit online financial marketplaces to compare schemes of multiple banks/NBFCs before applying for a loan. Credit bureaus consider such report requests raised from online financial marketplaces as soft inquiries, which do not affect your credit scores.

Avoid Defaulting on EMI payments

Your repayment history gets the highest weightage while calculating your credit scores. Therefore, not paying your EMIs or credit card bills by their due dates would negatively impact your credit scores, thereby, reducing your future loan/credit card eligibility. Hence, personal loan applicants should always look to repay their existing loans’ EMIs by their due dates.

Avoid borrowing personal loans from unrecognised lenders

Many unrecognised lending platforms may promise personal loans at lower interest rates or other favourable terms. However, they may steal your personal information and/or levy hidden charges, thereby increasing your borrowing costs exponentially. Therefore, prospective applicants should always avail personal loans from banks/NBFCs recognised by the RBI, having reliable lending history and favourable customer reviews.