5 things to know before applying for Personal Loan - Personal Loan Blog - Tata Capital

5 Factors to Keep in Mind When Availing a Personal Loan

Feb 27, 2017

Consider this: You have a job that does not pay you quite well and you have little to no savings living in a city like Mumbai. Your best friend just got back from an exotic holiday in Croatia and now you want to go too. But with your savings, the idea seems far-fetched. So you think of applying for a personal loan. But be warned borrowing money to splurge on a holiday is not a wrong decision financially, as long as you have the capacity for repayment.

Here are five things a potential borrower must be aware of when he/she applies for a personal loan:

1. Personal loan interest rates are higher

Interest rates for personal loans vary from bank to bank and are some of the highest compared to other loans. They generally range from 11.50% to 20% per annum depending on the financial institution, the borrower's credit worthiness and repayment capability and other factors. Before you apply for the loan make sure you do a comparison of the interest rate offered by different financial institutions.

2. Other costs

Apart from the interest rate and EMI to worry about you also have to find out what the processing charges, pre-payment penalties, documentation charges and late payment fees will be. The non-refundable loan processing fee is usually in the range of 0.25% to 3.03% of the loan amount; this fee is charged upfront by banks. Certain banks also charge a flat fee. If you want to prepay your loan, banks levy prepayment penalties in the range of 2% to 5% of the outstanding amount and this is usually allowed only after a certain period. Apart from this if there are any delays in your payment there will be a late charge levied.

3. Multiple personal loan applications lower your CIBIL score

A CIBIL score is a number assigned to every individual representing his/her creditworthiness. This number is important when banks decide whether a personal loan application should be approved or not. Customer information sent by banks and financial institutions is aggregated to produce this number, which indicates the customer's credit worthiness. Since it's become quite easy to apply for a personal loan people often make the mistake of sending in several loan applications to more than one lending institution. But this move is detrimental to their financial health. Too many loan applications will bring down your CIBIL score, thus affecting your credit worthiness.

Related:The 5 thumb rules of buying a used car loan

4. Your application can be rejected for several reasons

Too many applications for a personal loan in rapid succession and a prospective lender will perceive you as "credit hungry." You may be perceived as a credit risk, and either your loan application will be rejected or the interest rate will be higher. If you have a poor credit history your application can again get rejected. No one wants to lend to someone who already has a bad record of loan repayments. If you skip EMIs, default on loans, pay bills late, etc.; your decisions are affecting your chances of getting a loan sanctioned.

5. You could be eligible for a pre-approved loan

Many financial institutions are now offering pre-approved personal loans to their existing customers. A select group of customers, identified by the bank, are eligible for instant personal loan offers. Check with your banking institution to see if you're eligible for a pre-approved loan.

Steer clear of taking out loans for non-essential expenses like a holiday, investing in the stock market, or shopping. If you do need to take out a personal loan in an emergency, check interest rates, loan tenure, pre-payment clauses, turnaround time taken to process the loan, and eligibility criteria. You can get a personal loan today from not just a bank but any lending institution like TATA Capital that offers good interest rates and a hassle-free application process.