1. Purpose of the Loan

Understanding the purpose of a personal loan is crucial before applying. Personal loans are versatile and can be used for a variety of needs. By clarifying your purpose, you can better determine how much you need to borrow and for how long, making it easier to select the most suitable loan option.

2.Interest rate

The interest rate determines how much you’ll repay over time. Lower rates lead to less overall cost, making it essential to compare offers. Even a minor difference, like 1-2%, can result in significant savings over a few years. For instance, on a ₹5 lakh loan over three years, a rate reduction from 12% to 10% could save thousands. Always aim for the most competitive rate available to minimise repayment costs.

3.Loan amount

It’s crucial to assess the exact amount you need. Borrowing more than necessary can add unnecessary financial strain due to higher EMIs and interest costs. For example, if you need ₹3 lakh but borrow ₹5 lakh, the extra funds might be tempting to use but come with added repayment responsibilities. Calculate your needs precisely and borrow only what fits your financial goals and repayment capacity.

4.Loan tenure

Choosing the right loan tenure is a balancing act between manageable EMIs and total interest costs. Longer tenures lower monthly payments but increase the overall interest paid. A five-year loan may seem attractive with lower EMIs, but a three-year loan saves on interest. If you’re comfortable with slightly higher EMIs, opting for a shorter tenure can reduce the loan’s total cost significantly.

5.Processing fees

These are usually one-time charges, which can vary significantly between lenders. It’s common to see fees ranging from 1% to 2% of the loan amount. On a ₹4 lakh loan, a 1.5% fee adds ₹6,000 to your cost. Including this fee in your calculations ensures no surprises when the loan amount disbursed is slightly less than expected. Always inquire about the exact fee and whether it’s negotiable.

6.Prepayment options

If you anticipate being able to repay your loan early, check if the lender allows prepayments without penalties. Some lenders charge for early repayment, which can diminish the benefits of paying off a loan sooner. For instance, if you receive a bonus or extra income, prepaying part of the loan can save on interest. Ensure your lender’s policy aligns with your financial flexibility to maximise savings.

7.Eligibility criteria

Lenders have varying requirements regarding credit score, income and employment status. Understanding these upfront helps target the right loan options. For example, some banks may only offer competitive rates to individuals with a credit score above 750. If you have a lower score, consider improving it or exploring lenders with flexible criteria. Always confirm your eligibility before applying to avoid unnecessary inquiries.

8.EMI affordability

Your monthly EMI should comfortably fit within your budget without straining finances. An EMI calculator can help you determine how much you can afford based on your income. For instance, if you earn ₹60,000 a month, keeping your EMI below ₹18,000 can ensure funds remain for other expenses. Budgeting, in this way, avoids late payments and helps maintain financial stability throughout the loan tenure.

9.Additional charges

Beyond interest and processing fees, be aware of potential hidden charges like late payment fees or administrative charges. These can accumulate over time, increasing the overall cost of the loan. For instance, a ₹500 late fee on multiple missed payments can quickly add up. Always ask for a breakdown of any additional charges upfront to avoid unexpected expenses.

10.Lender reputation

Choose a lender with a solid reputation for transparency, customer service and fair practices. Reviews and recommendations can offer insights into other borrowers’ experiences. A well-regarded lender minimises the risk of hidden fees or unfavourable terms. Consider opting for lenders known for good communication and support, ensuring a smoother borrowing experience from application to repayment.