If you are planning to take a personal loan to bridge the gap in monetary need for a house, or to meet certain other expense like a marriage, education or on account of some exigency, you must take the following factors into account since these are the ones that will help you obtain loan from the banks at the best possible rates. We Indians, in any case are quiet sensitive to the costs and rightfully wish to have the best value product.
Improve your credit score
Your credit score is one of the vital factors that impact the cost of loan. Especially the personal loan, since it is unsecured and the banks are exposed to a higher risk on this lending product. In case you are not in need of this loan on account of an emergency, then you must look at improving your CIBIL score. Generally a score of 750 and above is deemed to be good. A lower score can lead to higher rate of interest and or reduction of loan amount. It can potentially even lead to outright rejection. So you must obtain your bureau report, check the status on scores and work towards its improvement if required.
Lower your credit utilization
A person with higher lending exposure is potentially a high risk customer. So if you are having a higher credit utilization, you would need to bring it down. Let us understand this through an example. Both Vijay and Murali have an income of 100,000. While Vijay is serving EMIs of 15,000 Murali has a monthly EMI obligation of 25,000. However, Vijay has multiple credit cards with a limit of 300,000 and has an outstanding of 250,000. On the other hand Mulrali has only one credit card with a limit of 50,000 with an outstanding of 10,000. In this case the credit utilization for Vijay is >80% while Murali has a utilization of 20%. This is not taking the loans into account. Despite Vijay having a lower EMI the overall credit utilization for him is much higher than that of Murali and this puts him in potentially risky segment. And thus a higher return may get charged.
Check on offers of top banks
Before applying the loan, one must check on the offers available with different top banks. One may have an account with say SBI, but ICICI personal loans may have a better offer running at the time one is looking to pick up the loan. Different banks have different policies and strategies so not all may offer the same rate of interest. For the borrower’s own benefit, it will be prudent to check the offers from all top banks. But a work of caution, this should be done through processing the applications with different banks. Enough tools are available today to ascertain the offerings. The banks’ website and the customer service will be a good source to get this information.
Compare APR and not the rate of interest
One should not fall for the lower rate of interest. What one needs to check is the APR (annual percentage rate). The APR gives the actual annual cost of the borrowed money. This since also factors the fee and other charges being levied on the loan, turns out to the best way to calculate the exact cost of loan and evaluate the available deals from various lending institutions.
Chose a shorter term loan
The fact that a longer term of loan will result in payment of higher interest is not a revelation. However, many a times a person just choses the longer term for availability of a higher disposable income. While one should not be stretching the finances and opting for an EMI that would put stress on available money to meet essential requirements, one should also not be taking it too easy and keeping the EMI very low.
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