10 Key Questions to Ask Before Applying for a Personal Loan

Let us now look at each question and its importance in more detail.

What do I need the funds for? 

Before applying for a personal loan, be clear about the reason for these funds. What do you require the funds for? It can be anything from travel and weddings to medical bills, education costs, festival expenditures, and even gadget/appliance purchases. Just because you are eligible for a loan does not mean you will apply for one straight away. Determine your purpose since it will help you determine the amount you require. Do not be tempted to apply for the maximum available amount and borrow what you need. 

What is the rate of interest? 

Do not make the mistake of applying without knowing the interest rate. The interest rate on a personal loan may vary between 12-38% per annum. It is crucial since it influences your total loan cost and the monthly EMI. Calculate the total interest cost of the loan over the tenure once you know the rate. Compare interest rates across lenders before making a final decision. You can ask your lender to do a soft check of your credit score (that will not negatively impact it like a hard inquiry) and give you an estimation of the interest rate. 

What is the processing fee? 

Personal loans often come with processing fees of 0.5-2%, depending on the policy of the bank or financial institution. Learn about this fee in advance since it will influence the total cost of the loan. If you are an existing customer of the bank, then you may get a better deal on the same. Some lenders also offer processing fee waivers from time to time. 

Are there any additional charges/costs? 

Keep an eye out for any extra costs linked to your loan. These may include documentation, legal, and administrative charges. Note the prepayment penalty, late fees, and foreclosure charges too. Ask the lender to list all the extra charges to help you estimate the total loan cost. 

What is the loan estimate? 

While you may apply for a particular loan amount, all the charges and extra costs may increase the final amount significantly. Hence, ask for a loan estimate from your lender. It will help you financially and mentally prepare for repayment. 

Are there any prepayment lock-ins or charges? 

If you plan to prepay your loan soon, this question is crucial. Many lenders have prepayment penalties between 0.5-2.5% of the outstanding amount. Some have lock-in periods of 6-12 months before you can start prepaying the loan. Learn about these aspects to create the right strategy. 

Does the loan have any eligibility criteria? 

Of course, every personal loan will have specific eligibility criteria. In most cases, the main parameters will include your age (minimum and maximum limits as per the bank), income (minimum income for the loan), credit score, debt in relation to your income, job profile, employer’s reputation, and so on. Ask about the criteria and see whether you fit the bill before applying. 

What documents should I provide for the loan? 

Ask about the documents that you need to apply for the loan. Lenders usually require KYC documents (identity, age, and address proof), proof of employment, bank statements, salary slips/Form 16, photographs, and other basic documents. 

How much time will it take to approve the loan application? 

It is a vital question since many lenders offer instant loan approvals, while some take a day or two. If you need the funds urgently, knowing more about approximate approval times is necessary. 

What is the time for the disbursal of the loan? 

Disbursal is another crucial aspect if you need the funds swiftly. Enquire about the average disbursal time from your loan officials. It is often 24-72 hours or even less. Some institutions may take longer, up to five days as well.