When you apply for a personal loan, what is the one factor that you pay the most attention to? If your answer is the interest rate, then you’re not alone. Almost all individuals looking for a personal loan tend to put too much focus on the interest rates offered by the financial institutions. Sometimes they go too far looking only at this one single factor when determining whether a personal loan offer is suitable for them or not.
But is the interest rate the only thing that you should focus on when you apply for a personal loan? Certainly not. Continue reading to know more.
What other factors should you consider when applying for a personal loan?
Interest rate is a very important factor that you should definitely take into account. Even a small increase in the interest rate percentage can give you dramatically different results when you calculate personal loan EMIs. That said, there are also several other factors that you should equally consider. Here’s a quick look at a few of them.
1. Eligibility criteria for the loan
Firstly, before you apply for a personal loan, you should always make sure to check the eligibility criteria. This criteria can vary from one financial institution to the other. For instance, while one lender may require you to have a very good credit score of 750 and above, others might be more lenient. Therefore, ensuring that you satisfy the eligibility criteria set by the institution should be your very first step.
2. The tenure of the loan
This is another major factor that many individuals fail to account for. The tenure that you choose for your personal loan determines the amount of interest that you pay to the lender. Choosing a long tenure may make your EMI obligations lower, but it will increase the total amount of interest that you would have to pay. On the contrary, opting for a shorter tenure may decrease the total interest payable, but will increase your monthly EMI obligations.
3. Fees and charges associated with the loan
Generally, financial institutions tend to levy certain fees and charges for issuing a personal loan. These include processing fees, verification charges, and late payment fees, among others. While most of the fees and charges are payable only once, they can still play a huge part when it comes to increasing the overall cost of borrowing. Therefore, before you apply for a personal loan, it is advisable to go through the entire list of fees and charges applicable since it can help you make a more informed decision.
4. Penalties for prepayment of the loan
Not all individuals may want to keep paying their personal loan EMIs till the end of the stipulated tenure. This is especially true in cases where individuals get windfall gains or are in possession of a lump sum amount of money that’s lying unused.
In such events, the individuals might want to pay off their personal loan at one go in a bid to lessen their financial burden considerably. However, not all financial institutions allow individuals to make prepayments for free. Some tend to charge a fee or a penalty, which is typically a percentage of the outstanding amount.
So, this is another factor that you should also take into consideration if you’re planning to make prepayments sometime in the future.
Going by this article, it is clear that the interest rate is not the only factor that individuals should look at when they apply for a personal loan. Since such a loan is usually a major financial obligation, it is crucial to look at other factors mentioned above, in addition to the interest rate. Also, it is a good idea to calculate personal loan EMIs with the help of a dedicated calculator before applying for one. This way, you can be sure of what your financial obligations are likely to be.