Personal Loan Tips: During the festive season—such as Diwali and Chhath—expenses often rise, ranging from purchases like clothing, jewelry, and vehicles to home decor. In such situations, if you find yourself short on funds, you might consider taking out a personal loan. Banks and financial institutions frequently offer various loan products during this period. However, making a decision based solely on advertisements highlighting low interest rates or quick loan approval is not advisable.

To choose an affordable personal loan, you should evaluate not just the interest rate, but also the processing fees, EMI, loan tenure, and terms regarding prepayment. Paying attention to these factors can help you reduce the total cost of your loan.

1. Look at the total cost, not just the interest rate

When considering a personal loan, start by comparing interest rates. Different banks may offer loans at varying interest rates to the same individual, depending on factors such as your salary, credit score, employment status, and the bank's specific policies. Therefore, it is wise to explore offers from other banks in addition to your own.

Keep in mind that a low interest rate alone does not necessarily make a loan "cheap." You must also account for processing fees and other associated costs. Under RBI guidelines, lenders are required to provide a 'Key Fact Statement' (KFS), which outlines the Annual Percentage Rate (APR)—the total annual cost of the loan. This includes both the interest and any other charges linked to the loan. Be sure to review this statement carefully before finalizing your loan.

2. Compare processing fees and other charges

Banks charge a processing fee for granting a personal loan, which is typically a fixed percentage of the loan amount. Additionally, there may be other applicable charges. When taking out a loan, always ask about the total amount you will be required to repay and the exact amount that will be credited to your account.

For instance, suppose you are taking a personal loan of ₹2 lakh. One bank might charge a 1% processing fee, while another charges 2%. In the first case, the fee would be ₹2,000, whereas in the second, it would be ₹4,000—meaning the upfront cost at the second bank is ₹2,000 higher. If the interest rates also differ, do not base your decision solely on the processing fee. Compare the total cost of the loan.

3. Choose an EMI that fits your budget

When taking out a loan, select an EMI amount that you can easily afford to pay every month. While expenses may be higher during festive seasons, remember that a loan EMI continues for several years. Therefore, consider not just your current needs, but also your budget for the months ahead. Avoid extending the loan tenure solely to lower the EMI; while this may reduce your monthly installment, it will increase the total interest payable.

For example, if you take a loan of ₹1 lakh at an annual interest rate of 12%, your EMI for a 3-year tenure would be approximately ₹3,321. If the same loan is taken for 5 years, the EMI would decrease to about ₹2,224—but you would end up paying more in total interest.

4. Check your credit score before applying for a loan

Your credit score can influence both the interest rate and the approval of your loan. A strong credit history increases your chances of receiving better offers. However, keep in mind that bank approval and interest rates also depend on other factors.

Review your credit report before applying for a loan, and take steps to correct any errors. It is also essential to pay your existing loan EMIs and credit card dues on time. Avoid applying to multiple banks simultaneously just to secure a loan.

5. Understand the terms for early loan repayment

You might occasionally wish to repay your loan ahead of schedule—for instance, upon receiving a bonus, savings, or other income—which can help you save on future interest. However, some loans may carry charges for early repayment or foreclosure. Be sure to understand these terms before taking out the loan.

Also, check whether the loan offers a partial prepayment facility, which allows you to make lump-sum payments to reduce the outstanding principal amount. Whether or not prepayment charges apply depends on the type of loan, the interest rate, and the applicable regulations; therefore, ensure you obtain this information in writing from the bank. How much can you save through a difference in interest rates?

Suppose you take out a personal loan of ₹1 lakh for a tenure of 3 years. Below is a comparison of the estimated EMI and total interest payable at different interest rates.

Interest Rate    Monthly EMI    Total Repayment    Total Interest
10%                     ₹3,227                   ₹1,16,170                ₹16,170
12%                    ₹3,321                   ₹1,19,571                ₹19,571
14%                    ₹3,418                  ₹1,23,037                ₹23,037

Note: These are estimated figures. This calculation does not include processing fees or other charges. The actual EMI may vary based on the bank's terms and conditions.

In this example, a loan with a 10% interest rate results in approximately ₹6,867 less in total interest compared to a loan at 14%. Therefore, even a small difference in the interest rate can impact your finances, provided the loan amount and tenure remain the same.

PC Social Media