Here's How You Can Get the Cheapest Personal Loan

For a long time, New Delhi-based software professional Nibedita Sharma had dreamt of renovating her house. The only stumbling block was money. There were always expenses that needed urgent attention, putting the renovation on the back-burner. Till she noticed seepage through the ceiling and couldn’t delay the renovation any further. A nervous Sharma, 40, decided to go in for a personal loan. To her pleasant surprise, many banks, non-banking financial companies (NBFCs) and fintech firms lined up to offer her a loan in a matter of seconds. All she had to do was click through a few buttons and the money was credited to her account. “My good credit score and long relationship with the bank helped me get a personal loan at 11 per cent [interest] in a matter of minutes. I will pay monthly EMIs (equated monthly instalments) over a period of two years,” she says.

Like Sharma, many Indians are fascinated by the easy availability of personal loans. Access to funds is no longer limited to people living in metros or with good credit scores. With fintech companies crowding the space, even people with low or no credit scores have better chances of obtaining a personal loan now.

While personal loans may be readily available, how does one get them cheap? Shop around for the lowest rates and opt for a fixed-rate loan as interest rates are rising. The lower the rate, the smaller your EMI. There are many factors lenders look at, including credit score and loan profile.

There are a few avenues that offer personal loans. While some charge you low interest rates, others offer flexible repayment options. Opt for the one that suits you the best. Banks offer personal loans at the lowest interest if you have a good credit score. A long and sustained relationship with the bank makes it even easier. In case of a pre-approved loan, you don’t even require any documents. The only downside is the lack of flexibility. Banks generally do not allow partial prepayment.

NBFCs can be your second option. “NBFCs have been active proponents of the use of technology in lending and thereby offer speed along with convenience, making it their biggest USP. The offerings on loan amount, rate of interest and tenure are competitive like banks, and are adjusted to suit the customer’s risk profile. Another big advantage is flexible repayment options and fully transparent charges,” says Manish Chaudhari, President and Chief of Staff at Poonawalla Fincorp, a Pune-based NBFC. Some of the popular names include Bajaj Finserv and Home Credit, among others.

Another option is fintech companies such as Navi Finserv and LoanTap. These are popular among millennials and the self-employed for their less-stringent eligibility criteria. But there are downsides. “Not everybody is technically literate. Not everybody has a smartphone. And, it can be addictive,” says Mel Gerard Carvill, Non-executive Director and Board Member at Home Credit N.V., a global consumer finance provider.

The growing demand for personal loans is reflected in CMIE’s recent Economic Outlook report. Outstanding personal loans between December 2021 and March 2022 increased between 2.4 per cent and 4 per cent, it says. With the economy coming out of the shadow of Covid-19, the demand for credit has been growing. CMIE says a revival in demand for bank credit commenced from the second half of FY22, which, according to analysts, seems to be continuing into FY23.

Of the various types of personal loans, an increase in credit card spending, housing loans, vehicle loans, loans for consumer durables and other personal loans have contributed to the surge. These together make up over 90 per cent of outstanding personal loans—which expanded by Rs 57,165 crore month-on-month in April 2022. However, month-on-month growth hit a five-month low of 1.7 per cent, owing to high inflation affecting consumer demand. This figure could come under further pressure, with the Reserve Bank of India (RBI) raising the repo rate twice in just 36 days to 4.9 per cent. While personal loans are growing, is it the right time to go in for one? Here are a few factors you should consider.

Key factors

In this rising interest rate scenario, before you apply for a personal loan, it is important to compare interest rates offered by lenders, as the lowest rate will make your EMIs smaller. Your credit score is also directly linked to the interest rate. And, the credit score is the only factor that is within the borrowers’ control that has a bearing on interest rates.

A credit score is a three-digit number assigned to an individual on a scale of 300-900 points. It is based on the unique algorithm of each bureau; a score of 750 or above is considered good. “To get a cheap personal loan, be sure to maintain a good credit score because a bad score would mean higher interest rates... If you have a credit score above 750, your chances of getting a personal loan increase significantly,” says Satyam Kumar, CEO and Co-founder of LoanTap, a fintech firm for online delivery of retail asset products. Another factor that determines the cost of your loan is your profile. Your income level as well as your occupation also have a bearing on interest rates.

Low interest rates should definitely be your one main criterion while choosing a personal loan. Experts say opting for fixed-rate personal loans would always be preferable during a rising interest rate regime. “Those who have availed personal loans at floating interest rates would be impacted by the rising repo rates,” says Sahil Arora, Senior Director at Paisabazaar, a fintech firm.

Arora adds that public sector banks (PSBs) usually offer personal loans at floating interest rates whereas most private banks offer personal loans at fixed interest rates. Moreover, one should go with banks with a good CASA ratio as such lenders tend to raise their rates at a slower pace compared to banks with a low ratio. CASA is the ratio of deposits in current account and savings account to the total deposits of the bank.

There are other variables, too, that you need to look at such as processing fees, legal charges, penal charges and even prepayment charges. Similarly, personal loan borrowers should confirm whether the interest rate, processing fees, tenure, prepayment, foreclosure charges and other personal loan features written in the personal loan agreement are the same as the ones communicated during the on-boarding process so that there are no surprises after taking the loan.

Before taking a personal loan, do explore other options available in the market. For example, if you want to take a personal loan for furniture or electric equipment, then a better deal could be to avail no-cost EMIs offered by many stores for tenures ranging from six to 12 months. So, be patient and compare all offers from all available lenders before taking the plunge.

The Risks

It is very important that you obtain a personal loan from sources governed by the RBI, and not from unscrupulous lenders, which charge you astronomical interest rates and resort to harassment in case of defaults. “As a consumer, you have to be aware of the remedies provided by sectoral regulators. Like in this case, the RBI, so that you can escalate it to the relevant authorities,” says LoanTap’s Kumar.

Historically, in an emergency, people used to borrow money from close friends and families or local lenders. With the rise of fintech apps, now you could get loans from all kinds of sources. However, be careful while opting for these. “All these are new sources, and regulators have been slightly slow to bring them all into the ambit. Because of an argument I always make, if you’re taking a loan, or making a deposit or buying an insurance policy, you shouldn’t have to worry who the supplier is; you shouldn’t have to think I’m at greater risk because I took it from supplier A rather than from supplier B. The regulation should be about the product, not about the provider. So, as a consumer, I should have equal protection,” says Carvill.

Sharma plugged her leaking ceiling by opting for loans from regulated sources. With loans flowing like water, don’t get lured by easy money; pick the right financing option and fulfil your dream like her.

@teena_kaushal