Taking a loan for any reason is a major decision as it forms a long-term commitment. Repaying the loan and its interest will affect your finances for months. But the impact won’t stop there. It will also impact your spending ability, your credit score, and your ability to take another loan. Thus, availing a loan is a big decision that needs deeper financial understanding. That is why it is important to consider all aspects of a personal loan before opting for credit. To make sure you don’t take this decision blindsided, we have compiled a list of ten questions you should ask before applying for a personal loan on an online loan app.
Here are the top questions that you must ask a lender before availing a personal loan. Whether you opt for a conventional lender or a personal loan app, asking these questions will help you make an informed decision.
Question 1 – Which loan should you choose?
This question may seem redundant as you have already decided to take a personal loan. However, even in personal loans, there is a wide variety of options. You can avail of loans, such as festival loans, travel loans, wedding loans, NRI loans, or home renovation loans. Of course, the type of loan depends on the reason why you are opting for the loan. But each loan has different interest rates and different repayment schedules. Therefore, it is necessary to first determine the type you wish to apply for. Online loan apps can help you compare different loans to find the best one for you.
Question 2 – What is the interest rate?
The most important factor to consider while taking a loan is its interest rate. The APR (Annual Percentage Rate) for a Personal Loan is typically between 11% to 22%. However, this is not a hard and fast rule. It can be less than 11% and more than 22% as well. But that depends on your lender and credit history. APR has a huge impact on your EMI and the cost of the loan. Therefore, you must check the interest rate. You can ask your preferred lender to give you an estimate of the interest rate based on your credit score. Once the lender gives you that, use a Personal Loan EMI calculator to check your EMIs. You can also negotiate this interest rate if you have a good credit score, good income or you work for an established organization.
Question 3 – How much is the processing fee?
The processing fee varies from lender to lender. Some lenders charge a fee of 0.5% to 2%. However, some can charge a fee as high as 5%. The processing fee is not a negligible amount and therefore you should check it carefully before choosing your lender.
The best way to pay a lower processing fee or none at all is to get a loan from the bank you are loyal to. If you are a long-term customer, the bank may consider lowering or even waiving the fee. You can negotiate on the processing fee with your lender if you have maintained a good relationship with the lender.
Question 4 – Are there any additional charges?
Personal loans do not only have an interest rate and processing fee. They also have many other charges that you have to pay. Some of these charges include the following:
- Documentation Fee
- Late Fee
- Prepayment Penalty
- Foreclosure Charges
- Legal Fee
- Loan Application Fee
Ask your preferred lender to give you the details of all the charges. Consider the total cost of the loan after adding these charges.
Question 5 – What is the loan estimate?
Loans take a toll on your finances. The stress of repaying a loan can be harrowing. To be better prepared, ask your bank for a loan estimate. Remember, you might have asked for a specific loan amount, but the additional charges can increase that amount. Also check out the monthly EMI that you would be paying and whether it fits into your budget comfortably.
Question 6 – What are the prepayment charges?
You may be planning to repay your loan before your loan tenure ends. While it is a good option to be free of the burden for you, it is not a good option for banks since it takes away their interest income. Banks charge a prepayment penalty, usually between 0.5% to 2.5% of the outstanding loan amount, to discourage borrowers from repaying their loans early. Therefore, check your lender’s prepayment policy and charges beforehand. In some cases, banks may waive prepayment charges.
Question 7 – What are the Eligibility Criteria for the Loan?
Banks do not give out loans easily. There is an eligibility criterion that the borrowers have to meet to become eligible for the loan. Typically, the borrower should be between the age of 18 to 55 years and have a good credit score (700 and above). You should also have stable employment and a steady source of income. Banks ask for proof of employment and, in cases of self-employed people, proof of income. Lenders also may have additional conditions which you must fulfill to get the loan.
Question 8 – Which documents are required for a loan application?
You need to submit several documents with your personal loan app an application. The requirement varies as per the lender, type of loan, credit score, etc., but typically these documents are required.
- Identity proof
- Proof of employment
- Proof of income
- Address proof
- PAN card
- Proof of home ownership
- Bank statement
- Last 3 years ITR
- Application form with a photograph
Question 9 – What are the terms for loan transfer?
Loan transfer means transferring the mortgage to another lender or transferring the responsibility of paying the EMIs to another borrower. In case of personal loans, you might want to transfer your loan to another lender who is offering you a rebate on the interest rate. Some lenders allow transfer of personal loans while some do not. You must confirm this with the lender before signing up for the loan.
Question 10 – Is it fixed interest rate or floating interest rate?
When you apply for a loan, one thing you must check is the nature of your interest rate. Is it fixed interest rate or floating interest rate? Fixed Interest Rate, as the name suggests, means that the offered interest rate will remain fixed throughout your entire loan tenure. They are comparatively higher than the floating interest rates. But the EMI to be paid every month will remain fixed.
Floating Interest Rates means that the interest rate will fluctuate as per the market rates. In this, the interest rates will be comparably lower, but the EMI to be paid every month will vary. One of the biggest advantages of floating interest rates is that there are no foreclosure charges in this type of loan. So, you must discuss these points with your lender and opt for the interest rate that best suits you.
Before applying for a personal loan, you should be clear about all aspects of it. We hope these questions help you gain clarity on what you need to know before getting a personal loan.