Personal loan is a kind of unsecured loan that helps in meeting any immediate financial obligation. While lenders do not require collateral for personal loan, an individual must consider several factors before availing it.

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Here are some of them:

Define Needs

Borrowers should first and foremost determine the purpose of taking loan, according to Sameer Aggarwal, co-founder and chief executive officer, RevFin, a digital lending Fintech startup.

They should ask themselves several times – is it possible to use savings or delay the purchase? If that is not possible, then what is the amount of the loan required and for how much duration?

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Check Eligibility

Normally, lenders see the credit score, income, affordability and depending on value of loan, any collateral that a borrower may have.

"Borrowers can find eligibility criteria on the websites of lending companies. There, they can also find EMI calculators that will give them a fair idea of monthly repayment based on the loan amount, duration and interest rate," Aggarwal explains.

According to Sashank Rishyasringa, Co-founder, Capital Float, new to credit or low bureau score customers should select a list of providers where the chances of approval are high. This will help in minimizing the negative impact on credit scores at the time of application.

Check Cost Of Loan

This includes the interest to be paid, any processing fee or other charges applied for late payments and pre-closure charges.

"Calculate the total repayment over the entire duration of the loan and compare different loans as different lenders may apply different charges," suggests Aggarwal.

One important thing to consider is the way interest is applied on the loan.

Normally for personal loans, interest is applied on a reducing basis, i.e., interest is applied monthly on the outstanding principal amount and not in the full loan amount. However, many lenders quote interest on a flat basis, i.e., on the entire loan amount.

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Total interest paid on a reducing basis will be much lower than the same interest rate applied on a flat basis. Therefore, the total amount of repayment should be calculated prior loan selection, according to Aggarwal.

Check Credibility Of Lender

The credibility of the loan-disbursement entity can be identified from the customer experience of other users who've availed a loan from the respective platform earlier, as per Madhusudan Ekambaram, co-founder and chief executive officer, KreditBee, a digital lender.

While banks form a reliable source of lending by their mere nature, a quick look at the social media engagement and Google Play Store ratings of Fintech platforms will give the users a good idea of what to expect.

In words of Rishyasringa, "The current scenario also makes it important to choose a lending institution which provides an end-to-end digital application and servicing process. It will be inconvenient and potentially risky to engage with institutions where human contact or branch visits are necessary."

Need For Additional Products Like EMI Protection Plans or Life Insurance

These products help borrowers in repaying the loan in case of eventualities like death, loss of job, hospitalisation etc.

"Borrowers must assess risk of repayment while deciding whether to take such products. Generally, where the loan amount is high and the duration is long, such products are recommended," advises Aggarwal.

Other Factors

According to Ekambaram, the application process, documentation required, procedures involved (manual or digital or both), and timeline of disbursement are a few other factors the user should be cognizant of to ensure an educated decision-making.

Disclaimer: CNBCTV18.com advises users to check with certified experts before taking any investment decisions.

First Published:Sept 8, 2020 7:52 PM IST