1.The importance of your credit score 

In India, your credit score, particularly the one provided by CIBIL, plays a key role in determining both your personal loan eligibility and the interest rate you will be offered. Lenders generally favour a higher score, as it signals reliable credit management. On the other hand, a lower score may result in higher interest rates or even lead to the rejection of your loan application. 

To maintain a good CIBIL score, it’s essential to pay your loan EMIs and credit card bills on time, keep your credit utilisation ratio under control and regularly review your CIBIL report to spot and resolve any errors. Many banks and financial institutions offer free CIBIL score checks, helping you monitor your credit health with ease.

2.The term of your personal loan

The loan tenure or the period within which you must repay the loan, greatly impacts both your Equated Monthly Instalments (EMIs) and the total interest outflow. In India, personal loans typically offer tenures ranging from 12 months to 60 months. 

A longer tenure reduces the EMI, making it easier to manage monthly expenses, but increases the total interest paid over time. On the other hand, a shorter tenure may have higher EMIs but results in lower overall interest costs. It’s essential to choose a tenure based on your repayment capacity while balancing monthly cash flow.

3.The comparison of interest rates 

Interest rates on personal loans in India can vary widely across different banks and Non-Banking Financial Companies (NBFCs). Comparing interest rates is vital because even a small difference can significantly impact your EMI and the overall cost of the loan. You can typically find rates ranging from 10% to 24% depending on your creditworthiness. 

Lenders offer two types of interest rates: fixed and floating. Fixed rates remain the same throughout the tenure, while floating rates change based on the Reserve Bank of India (RBI) guidelines and market conditions. Be sure to compare both types before making a decision.

4.The overall cost of your personal loan

The total cost of your personal loan in India goes beyond the interest rate. There are several additional charges to consider, including processing fees (usually 1% to 3% of the loan amount), Goods and Services Tax (GST), prepayment penalties and late payment fees. These can significantly add to the total cost of the loan. 

Therefore, it’s crucial to ask for a detailed breakdown of all applicable charges from your lender and calculate the annual percentage rate (APR) to get a clearer picture of the actual cost.

5.The financial standing to repay the loan 

In India, lenders evaluate your repayment capacity based on your Fixed Obligation to Income Ratio (FOIR). FOIR calculates how much of your monthly income is committed to repaying debts, including your proposed loan. 

Ideally, your FOIR should not exceed 40% to 50% of your monthly income. This means that if your monthly income is ₹1 lakh, your total debt obligations, including the new loan’s EMI, should not exceed ₹40,000 to ₹50,000. Evaluating this beforehand ensures that you can comfortably repay the loan without stretching your finances.

6.The prepayment terms of your personal loan 

Most banks and NBFCs in India allow prepayment of personal loans, which can save you interest costs if you have surplus funds. However, there may be prepayment penalties ranging from 2% to 5% of the outstanding loan amount, particularly during the initial period of the loan. 

It’s important to check the terms and conditions regarding prepayment before signing the loan agreement. If you anticipate being able to prepay your loan, opt for lenders that have no or low prepayment charges.

7.The security of your personal loan 

It is possible to insure your personal loan to protect your family from the financial burden in the event of an unfortunate incident. Many lenders offer personal loan protection plans that cover the outstanding loan amount if something happens to the borrower during the loan tenure. 

With a personal loan protection plan, you can choose the coverage amount and the term, ensuring your family isn’t financially strained. In case of critical illness, disability or death, the insurer will take care of the loan repayment, providing much-needed relief during difficult times.