Whether you have a medical emergency, want to renovate your home, or just want to take your whole family on vacation – for all kinds of planned and unplanned expenses, personal loans are great enablers. With personal loan interest rates becoming increasingly competitive, it also makes perfect sense to opt for this form of collateral-free lending rather than over-extending your credit card.
But how to know which personal loan provider is the best for you? And how to compare personal loans before actually applying for one? Here are some terms that you need to know about personal loans, and which will help you in your decision-making.
Principal Amount
The principal amount is the amount that you receive once your personal loan application is approved. Although different lenders can have different criteria for giving personal loans, usually the principal amount ranges between Rs. 75,000 to Rs. 25,00,000. Based on your income, other eligibility factors, and specific requirements, you can apply for a personal loan within this range.
Interest Rate
This is the rate at which you will be charged interest on the principal loan amount. Interest rate is also known as the cost of credit as it’s what you pay to your lender in return for borrowing funds (or taking a loan). Personal loan interest rates can vary from lender to lender and even depend on the credit score of individual applicants.
Unsecured Loan
Personal loans are, by definition, unsecured loans, which means you don’t have to give any collateral to the bank or lender while taking them. While comparing personal loans, you must check the fine print of loan documents and ensure that the loan is definitely unsecured.
Application/Processing Charges
When you apply for a personal loan, the lending institution can charge some administrative or processing charges based on their processes. These charges are often deducted from the principal loan amount before it is disbursed to you. These charges also reduce the net amount you receive upfront and may be repeated year on year. Thus, while comparing personal loans, you must check for the application or processing charges and select the most practical option.
Co-Applicant
For NRI personal loans, lenders usually demand a co-applicant to apply for the loan along with the NRI primary applicant. This reduces the risk of default and smoothens the process of loan disbursal and recovery. Thus, if you are looking for NRI personal loans, then you should compare eligibility criteria and terms for co-applicant as well.
Annual Percentage Rate
The annual percentage rate or APR is a combination of the principal amount, interest rate, and overhead charges that you will be expected to bear to repay the loan. This is a more holistic representation of the cost of taking credit and better help you compare different personal loan solutions.
EMI
EMI or Equalized Monthly Installment is the amount that you would effectively pay on a monthly basis to repay your personal loan. Your EMI is affected by the principal amount, interest rate, tenure of the loan, and overhead charges (if any). You can also use a personal loan EMI calculator to determine this amount and compare personal loans options.
Term/Tenure
This is the duration for which you can take out the loan. Most lenders extend a personal loan for a maximum period of 6 years.
Pre-payment
If you wish to pay off your personal loan before its tenure is over, that is called pre-payment. You can make a full pre-payment of the outstanding principal amount or part payment. In both cases, there may be pre-payment fees charged by your lender, which you must compare before getting the loan.
Late Payment Fees
This is the fee charged by the lender if you fail to pay your EMI on time. Different lenders can charge different fees and thus must be compared before applying for a personal loan.
Summing Up
It’s paramount that you go through all the terms and conditions before you apply for a personal loan with any entity. All in all, personal loans are great saviours when it comes to planned or unplanned overhead expenses. They are unsecured, don’t require collateral, and are disbursed very quickly.
Check your eligibility for a personal loan here.
