Choosing a Personal Loan Lender: Is Low Interest Rate a Deciding Factor?

15 Jan 2020 // 23 min read // Personal Loans
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Though the new year 2020 celebrations have come to an end, people are still basking in the holidays’ spirit, enjoying winters, and are indulging themselves to the fullest. Be it shopping endlessly to amuse your heart or planning a trip with your family & friends, all of us love to splurge, celebrate, and spend time with loved ones.

Thus it is also that time of the year that attracts maximum discounts, cashback, and giveaways all around the universe. It indeed is possible that you already have unimaginable offers lying idle in your inbox.

Low Interest Rate Offer: Is it really what it sounds like?

Newspapers, radio, magazines, websites, blogs all are nowadays full of advertisements from different financial institutions. Personal Loans are the most advertised financial products in the present times.

Catchphrases like ‘Lowest Personal Loan Interest Rates,’ ‘2-minute Loan approval’ etc. are everywhere trying to grab the attention of prospective borrowers. Many unsuspecting individuals fall into this trap and grab the offer without exercising due diligence, only to regret it later.

However, not every offer is misleading. Some indeed offer the best of the value to the customer.

Let’s help you analyse available lenders’ offers carefully. Selecting a Personal Loan solely on the basis of interest rates is not a wise decision. Undoubtedly, the interest rate is an extremely crucial parameter for deciding the affordability, but several other factors require your due consideration.

  • Annual Percentage Rate:  Annual Percentage Rate (APR) is a much accurate indicator of the cost of the loan as compared to the interest rate. This is because it includes various other costs that you will have to incur in a year, reflecting the true cost of the loan.

    Many instances can be found where a comparison between two different Personal Loan offers indicates that low interest rate does not necessarily mean low APR. So, your decision should basically be based on APR and not the interest rate.

  • Interest Rate Structure: The interest rate structure being followed by the lender is also of extreme importance. Whether the loan is based on a floating rate or a fixed-rate structure also needs to be considered. Generally, the floating-rate structure is preferable to a fixed-rate structure, particularly in the present-day soft rate market situations.
  • Interest calculation: Whether the interest will be calculated on reducing balance basis or will remain fixed for the repayment tenor is another crucial aspect to consider before Applying for a Personal Loan. You must prefer a reducing balance basis as it helps minimize your interest cost and makes the loan more affordable for you.
  • Duration of the offer: Many times, such offers have limited period validity, i.e., promotional interest rates for the first year and subsequently higher interest rates. You must read the fine print carefully to determine if this is the case.

How to select the best Personal Loan offer?

To select the best Personal Loan offer, you must look beyond the low interest rates. There are various important factors that need due consideration before reaching a correct decision.

Some of the major factors that you must look into while selecting a Personal Loan are:

  • Quantum of the loan: You must assess the amount you require as a Personal Loan. The maximum amount available as unsecured Personal Loans can go up to Rs. 40 Lakhs, such as in the case of HDFC Bank Personal Loans. So, the decision regarding the suitability of an offer also depends on the exact amount you require. Borrowing more or less than the required amount just because of low-interest rates is not recommended. 
  • Repayment Tenor: You need to select a repayment tenor, which gives you an EMI amount that you can easily afford to pay. For instance, when you avail of an SBI Personal Loan, you can opt for a repayment tenor of up to 72 months. Though, you must remember that longer is the repayment tenor, higher is your interest cost, despite the lower EMI.
  • Eligibility criteria: Every lender has specific eligibility criteria which you must satisfy to avail a Personal Loan. If your profile does not fulfill the eligibility criteria specified by the lender, then there is no point in applying with that lender. Applying to the right lender helps you save you a lot of time and money and assures loan approval.
  • Add-Ons being offered: Many lenders might charge a higher interest rate but also offer some add-ons reducing the actual cost of the loan. Free insurance, free Credit Card, discount vouchers, etc. are some of the add-ons that can make your borrowing experience more beneficial.
  • Processing charges: Processing charges for Personal Loans vary greatly across lenders and can add up to a substantial amount. For instance, processing charges for Bajaj Finserv Personal Loan can go up to 4.13% while for SBI Personal Loan processing charges are capped at 1%. So, you must keep a close look on the processing charges being levied by the lender to ascertain the actual cost of the Personal Loan.
  • The reputation of the lender: Reputation of the lenders is also an important factor to be considered as you will be having a long-term relationship with them. Availing a Personal Loan from a lender known to have a transparent dealing and customer-friendly attitude is always preferable.

So, do not be swayed by low Personal Loan interest rates and make an informed decision based on all crucial aspects and identify the best Personal Loan offer for real.

Also Read: 3 Smart Ways to Avail a Low Interest Rate Personal Loans

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