Every lender claims to offer the “Best Personal Loan”. Fair enough. “Best” is anyways subjective. No one knows what aspect of the personal loan the bank is referring to. Well, according to you, what shall be the features of the “Best personal Loan”? In this post, let’s find out.
While we are discussing the “best” personal loan, I do not mean you must borrow indiscriminately. Do not borrow just because a loan is easily available. Do not borrow just to make a lifestyle statement. Irresponsible credit behavior can land you in serious financial problems.
#1 Low Interest Rate
That’s a no-brainer. A low interest rate means a low EMI. It reduces burden on your cashflows and makes the loan more affordable.
A Rs 5 lacs personal loan at 10% p.a. for 2 years has an EMI of Rs 23,072.
The same Rs 5 lac loan for 2 years at 12% p.a. would have an EMI of Rs 23, 536.
#2 Low Processing Fee
This is an aspect that borrowers sometimes tend to ignore, and the lenders do not bring up until the last moment. Processing fee is an upfront outgo on your loan. Unlike the interest cost, it fetches GST impact too.
While it is always better to a zero or a low processing fee, the impact of processing fee on overall cost of loan is lower for a long tenure loan. Why? Because the impact is spread over a much longer period.
Personal loans, on the other hand, are short-term loans. Thus, the impact on the overall cost is spread over a short period and is much higher.
- A 2% processing fee increases the cost of a 20-year home loan from 9% p.a. to 9.33% p.a.
- A 2% processing fee increases the cost of a 2-year personal loan from 9% p.a. to 11.37% p.a.
Hence, this is an aspect you must watch out for. Your bank may make a concession on the interest rate (an area you focus on) but take it all back by levying a higher processing fee (that you may not focus on).
Which one would you pick?
- 2- year personal loan at 9% p.a. and 2% processing fee
- 2- year personal loan at 10% p.a. and 1% processing fee
- 2-year personal loan at 11% p.a. and zero processing fee
The net cost of the 9% loan is 11.37%. The net cost of the 10% loan is 11.18% p.a. As you can see, the 11% loan, which seems the most expensive, is the cheapest. The banks know this game.
Hence, you must have noticed a small processing of Rs 99 or Rs 199 slapped quietly when you opt for merchant (instant) EMIs on Amazon or Flipkart. You focus on the EMI amount during purchase. A fee of Rs 99 or Rs 199 is too small for you to bother about. Sometimes, retailers don’t even mention it. The bank smartly sneaks in the processing fee in your credit card statement. Merchant EMIs are very short term, mostly a few months. Hence, the impact of processing fee is quite high.
Note that different banks can use a different nomenclature. Some products may have multiple charges. When I use the word “processing fee”, I am including all non-interest and non-contingent charges.
#3 Zero or Low Prepayment Charges
The banks can’t charge prepayment penalty on floating rate loans, but they can charge on fixed rate loans. And personal loans are mostly fixed rate loans and can thus have prepayment charges.
The prepayment charges in personal loans can be quite high, ranging from 2% to 5% of the prepayment amount. Such high charges will simply nullify the benefit of prepaying a high-cost loan. These charges are put to dissuade borrowers from repaying loans.
Personal loans are usually not cheap. Hence, everything else being the same, I would prefer a loan product that allows me to close the loan without much friction. Low or zero prepayment charges.
#4 Quick Disbursal
This may not be important to all. Plus, this is also an area where you can’t be sure until you apply for the loan. If you are lucky, disbursement can happen quickly. If you are unlucky, you can get stuck in an endless loop of document exchange.
The earlier points (Low interest rate, low processing fee, low prepayment charges) are objective. You can read loan terms and conditions to figure these out. The “quick disbursal” has an element of luck involved.
How Can You Get a Good Deal on Loans?
The answer is simple. The banks like to lend to credit-worthy borrowers and are more likely to make concessions to such borrowers. Your credit score is the simplest and the quickest way to assess your creditworthiness. Hence, if you plan to borrow in the future, keep your credit score high. To keep the credit score high, you must pay all your loan and credit card dues on time.
Sometimes, your credit score can get affected due to a loan fraud or simply a data entry/processing error. Check your credit score regularly. You can download your full credit report and check your credit score for free with different credit bureaus once every calendar year. Use the option.
If you notice your credit score is low due to an error/fraudulent entry, raise the issue with the credit bureau and concerned lender. Note that credit bureaus such as CIBIL can only forward your request to the bank/lender for rectification. The credit bureaus cannot adjust entries on their own. They can only make changes based on lender feedback.
On the other hand, if your credit score is low due to valid reasons, take steps to improve your credit score.
A good credit score is one part. Another aspect is your repayment ability. You are likely to get better deals on loans (loan amounts) where your repayment ability is high (your cashflows can easily support EMI payments).
If you feel there are additional aspects that can be included for determining the “best personal loan”, do let us know in the comments section below.