Look for promotional offers, fee waiver and easy foreclosure norms
Banks are betting big on unsecured personal loans as they offer concessions in interest rates and/or processing fees to their existing customers. Some lenders are also offering pre-approved personal loans to their existing customers with instant or same-day loan disbursal.
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Between February 2022 and 2023, other personal loans grew 26% as compared to 17% for all other loans (education, housing, vehicle, etc.) to individuals, data from Reserve Bank of India (RBI) show. As most lenders use risk-based pricing methods for setting interest rates, those with higher credit scores are also offered lower interest rates.
The interest rates of personal loans vary from 10.49% to 24% per annum depending on an applicant’s monthly income, age, credit score, employer and employment profile, etc., while the processing fee can range from nil to 3% of the loan amount. While RBI has barred levy of prepayment/ foreclosure fees on loans offered at floating interest rates, lenders are free to levy prepayment and/or foreclosure fees on part-prepayment or foreclosure of those at fixed rates. These fees can go up to 5% on the outstanding loan amount. Some lenders allow part-prepayment or foreclosures only after payment of a predetermined number of EMIs.
Negotiate the interest rate
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A good credit score can help a borrower to negotiate a better interest rate for a personal loan. Adhil Shetty, CEO, Bankbazaar.com, says a borrower must shop around and compare interest rates and terms from different lenders. “This will help him get a better idea of the prevailing rates in the market and give him bargaining power. Some lenders may offer promotional offers such as lower interest rates or fee waivers for a limited time. Look out for such offers and take advantage of them,” he says.
Understand the fine print
While borrowers do not have to provide collateral to secure the loan, one must understand the terms and conditions before finalising it. Most lenders offer loan tenures of up to five years, with a few offering longer tenures of six and seven years.
Sahil Arora, senior director & business head, Unsecured Loans, Paisabazaar, says personal loan applicants should consider their EMI affordability while choosing their loan tenures. “Opting for longer tenures would lead to smaller EMIs but at higher interest cost while the reverse will stand true for personal loans with shorter tenures. Moreover, lenders prefer applicants whose monthly EMI obligations (including that of the proposed personal loan) are within 50-55% of their monthly incomes,” he says.
Applicants should start their loan search by first approaching banks and NBFCs with whom they already have deposit or lending relationships. This should be followed by visiting online financial marketplaces, which provide the best personal loan offers.
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Check out cheaper options
As end-use of most personal loans would be for medical needs, marriage, education, home renovation or vacation, look at options other than high-cost personal loans. Those having adequate gold jewellery can consider a gold loan. These have no end-usage restriction and are disbursed within a few hours of the loan application. Moreover, the interest rates of gold loans are usually lower than that of personal loan interest rates.
Existing home loan borrowers can contact their home loan lenders for top-up loans. “The interest rates of top-up home loans are usually the same as underlying home loans or a notch higher, which in most likelihood would make it a cheaper option for home loan borrowers,” says Arora.
THE RIGHT DEAL
- A good credit score can help you negotiate a better interest rate for a personal loan
- Start your loan search by first approaching banks/ NBFCs with whom you have an existing relationship
- Understand the terms and conditions for foreclosure/ prepayment before finalising the loan
