First time personal loan borrower? Things to check before you apply

Here are a few important things to check before applying for a personal loan:

1. Check your credit score: Credit score is the most important parameter that lenders check before granting a personal loan to you. Given that these are unsecured loans, the risk involved is much higher for the lenders. Hence, they will favor the applicants with a higher credit score as it indicates better repayment capacity of the borrowers. A credit score of 650 and above will give you a good chance of getting a personal loan with a lower interest rate and good terms. To improve your credit score, start paying your bills on time and use your credit card as less as possible. If you do not have a credit score, plan to build one by taking a credit card or a small secured loan to build your credit history over a period of few months.

2. Pick the lender carefully: Before applying for a personal, it’s necessary to do a thorough research of all the options available to you. Don’t fall for the first lender who approaches you with a personal loan offer. It is wise to choose the lender who offers you a lower rate of interest on personal loans with better terms and conditions. You can shop around for the lowest rate using an online aggregator. Interest rates can differ widely from lender to lender, so explore your options.Such as interest rate for SBI Personal Loan is 12.50% while other banks like Axis Bank, HDFC Bank and ICICI Bank offer personal loans at a different interest rate. So always do your research before selecting a Bank or NBFC.

3. Don’t approach too many lenders: Every time you approach the lender, it results in a query in credit bureau as the lenders check your score to understand your ability to repay the loan. If you approach too many lenders in a short period of time, you are considered 'credit hungry' and it reduces your chances of banks approving the loan application. This is why it makes sense to apply through fintech lenders to zero in on the best loan across multiple banks without compromising your credit score.

4. Check your repayment capacity: Before applying for the personal loan, it is advisable to check whether you will be able to pay the EMIs from your current monthly income. You can calculate your monthly installments using an online Personal Loan EMI calculator to assess the right amount of EMI you can comfortably service and the corresponding loan amount. Banks also conduct the repayment capacity assessment of the borrower at the time of granting the loan. Hence, if you apply for the right loan amount in the first instance, chances of your loan approval becomes higher.

5. Check your eligibility: Another important point to consider when applying for a personal loan is to check your eligibility, especially in terms of your income and employment. Banks generally require you to be employed for at least two years, and at least one year with the current employer. If you change your job frequently, the chances of your loan getting approved will be lesser. Also, your loan will not be approved if you are serving a notice period. Banks also require a minimum income of Rs. 15,000 per month to consider you for a personal loan.

6. Collect and be ready with proper documents: Lack of proper documentation can lead to rejection of your personal loan application. Make sure you have all the required documents before applying for the personal loan. Documents required by banks include - Identity proof (Aadhaar card, PAN Card, Voter ID, Driving License), residence proof (Passport, Driving License, Election ID card), signed application form and income proof (last 3 months salary slips, Form 16 or Income Tax Returns).

7. Negotiate for best rate: Banks are always competing among themselves for lending to creditworthy borrowers. So negotiate hard to get a better offer on your loan. You can also ask your banker or official representative to lower the interest rate or waive the processing fee.

8. Read the fine print: Apart from interest rates, there are can be other charges such as processing fee, late penalty charges, insurance requirements, interest reset clauses, etc that you have to pay when taking a personal loan. These charges, if not considered in the beginning, can catch you off-guard at a later date. So it is best if you could just spend some extra time reading the document carefully rather than getting stuck in complications later on. Many of these loans carry hefty prepayment penalties and it may deter you from prepaying your loans in the future, even when you have the liquidity to do so.

9. Know the process of deferment: Knowing the process can come in handy in case you are unable to meet your repayment obligations due to a temporary cash crunch. Unforeseen circumstances such as a loss of the job or another emergency can create short-term cash crunch and inability to meet payment obligations. Hence, you should know how to handle such situations at the time of accessing the loan.

As a first-time borrower, planning to take a personal loan for your immediate financial needs, careful planning on each of the above items can help you take the right personal loan decision.