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A complete guide to help you choose the right personal loan – Forbes Advisor INDIA


Today, we are seeing an increase in the number of people opting for a personal loan, especially to finance their major purchases. A personal loan simply refers to the unsecured loan taken out by an individual from a bank or a non-bank financial company (NBFC) to meet their personal needs.

A personal loan, unlike a home or car loan, is not secured by an asset. Eligibility for a personal loan depends on factors such as employment and credit history, repayment capacity, income level, etc. Availing a personal loan is not only easy but also a preferred option, for reasons like less paperwork and the fact that there is no need for collateral to avail it.

What you need to know before taking out a personal loan

Although personal loans offer many benefits, it is also important to understand that defaulting on a personal loan can lead to negative consequences that can negatively affect your credit score. This, in turn, could reduce your chances of getting a personal loan in the future.

You should keep in mind that interest rates for personal loans are much higher than for other types of loans. This snowball effect of interest rates is simply due to the fact that these unsecured loans are made to borrowers without any collateral.

Personal loans can be used for any financial need of the individual. Lenders, on the other hand, will not monitor or limit the end use of borrowed funds.

It can be beneficial for individuals to overcome the difficult times brought about by the pandemic. The Covid-19 pandemic has also catapulted the popularity of personal loans, resulting in a surplus of personal loan options available in the market today. At times like these, choosing the right personal loan can be quite a daunting task. It has become more important than ever for borrowers to carefully study the different lenders and the loan terms offered by the lenders, in order to determine which personal loan is best for them.

To make it easier for you, here are the top 10 factors you need to consider when looking for the right personal loan.

10 factors to help you choose the right personal loan

Before locking yourself into a specific personal loan, it is essential that you do detailed research. Here are the main things you need to consider:

1. Loan amount

Before acting on your decision to avail a personal loan, one of the most critical factors is deciding on the amount of loan you wish to borrow.

Depending on the need for funds, it is important that you set the desired loan amount and then proceed to calculate the equivalent monthly installment obligations (EMI) based on the loan amount and the term for which you are taking the loan.

Comparing the loan offered by different lenders will help you settle for a cheaper personal loan.

2. Loan repayment term

When you take out a loan, it is advisable to repay the loan as soon as possible. That said, lenders that offer a short repayment term would naturally require higher EMIs, due to fewer installments.

A loan default could leave a bad mark on your credit score, discouraging lenders from granting you loans in the future. So while you’re looking to get out of debt soon, it’s important to assess your ability to repay and choose the loan term that’s right for you.

3. Lenders

It turns out that the personal loan is the most common product offered by banks and financial institutions. More often than not, we are inundated with calls and text messages offering us personal loans at attractive interest rates and terms.

With a plethora of options to choose from, choosing the right lender can be overwhelming to say the least. In such cases, it is crucial that you do your due diligence to avoid falling into the trap of scammers and lending traps.

To make an informed decision, using an online aggregation platform would be the best choice. You can compare the different lenders, their terms and their interest rates and you will even be informed about the offers that these different lenders offer from time to time, on these platforms. If you are looking for a long-term loan, you may consider going to an established bank that offers favorable terms.

4. Credit score

A credit score or CIBIL score is a key indicator of your eligibility for a personal loan. Before taking the step to benefit from a personal loan, it is important that you check your credit rating or CIBIL.

While a higher score increases your chances of getting a personal loan approved, credit score also impacts the loan amount sanctioned, including loan terms such as interest rate and EMIs.

The credit score reflects your overall financial health and gives the lender a better understanding of your debt repayment abilities. A credit score above 750 is considered a good score to get a sanctioned personal loan on favorable terms.

5. Interest rate

You can have a myriad of lenders approaching you with impressive, slightly low interest rates. As enticing as this offer may be, keep in mind that when you opt for loans with such low interest rates, you may end up paying more due to many other unreasonable loan terms.

A thorough study and comparison of the interest rates of different lenders is essential before taking out a personal loan.

Another factor you need to keep in mind is how interest rates are calculated. Loan interest rates calculated using the declining balance method are considered ideal in most cases.

6. EMI Calculations

Before taking out a loan, it is essential that you get used to the process of calculating the EMI.

Knowing this will help you understand your ability to repay the loan on time. With options like No-Charge EMI and Advanced EMI on the market, it’s important to understand how these EMIs are calculated to ensure you avoid paying more than necessary.

7. Set-up costs

Some lenders charge origination fees for personal loans. The origination fee is a fixed amount that must be paid once the loan application has been sent to the lender or when the loan application has been verified.

Knowing the rates at which origination fees are charged by different lenders will help you make the right decision and avoid exorbitant origination fees.

8. Foreclosure and prepayment fees

Another set of fees you need to be wary of are foreclosure and prepayment fees. These are fees that come into play if the borrower expects to settle their loan before the term of their loan.

While some banks may choose not to charge foreclosure fees, most banks charge between 2% and 5% of the balance amount.

Comparing these fees will help you identify lenders that offer the most flexibility in repayment, whether partial or full.

9. Other costs

Besides the fees mentioned above, be sure to check the terms of the loan for all other fees such as administrative fees, loan processing fees, etc.

Look for these fees on the lender’s website or on their loan application forms. Being well aware of all these additional fees and charges will help you know how much you will be charged as part of the process of applying for a personal loan.

10. Consider your current liabilities

Before applying for a loan, you need to consider your debt and existing debts. There may be instances where you already have an outstanding loan that needs to be repaid or credit card bills that need to be settled. It is important to take these obligations into account and calculate your debt-to-income ratio.

It will also help you know if you have enough money to repay the loan. If your debt-to-equity ratio is high, you may want to consider other options, such as borrowing from friends and family instead of taking out a personal loan.


With your financial goals in mind, you may also want to consider the lender’s credibility and the quality of their customer service before applying for a personal loan.

While personal loans are available in abundance, settling for the right personal loan requires a good amount of research on the part of the borrower. Before applying for the loan, you should carefully analyze all the pros and cons of different lenders, read the loan documents carefully, and seal one that offers competitive interest rates along with flexible repayment options and an appropriate term.