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Mr Narayana is a shopkeeper living on the outskirts of Delhi. His monthly revenue has recently declined as a result of the pandemic. As a result, he is having some difficulties paying for his child's higher education. Narayana is looking for a personal loan to help him solve this difficulty. He is pretty sure of getting approved for a loan, as he poses a strong credit profile and earns a decent income. However, he is unsure of how much of a loan he should take and what efforts he should make to keep the personal loan interest rate within his budget.
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Therefore, to assist him in making a decision, the article will cover all of his doubts. If you have similar concerns, please read the entire piece.
- Compare the Personal Loan Interest Rate:
The most important step that we suggest Mr Narayana and you follow is the interest rate comparison. There are several personal loan lenders in the market. Each of these lenders offers a different interest rate. Consider the following variables as the main basis for comparison.
- Annual Percentage Rate (APR):
The annual percentage rate (APR) is the total cost of borrowing a personal loan. It takes into account several other elements in addition to the interest rate. Some of the most popular costs included in an APR are processing fees, verification charges, foreclosure fees, and a few others.
If the lender is charging a higher APR, refrain from applying with them. A higher APR implies a higher personal loan interest rate.
- Loan Term:
The next step involved in interest comparison is to check the lender's maximum and minimum loan tenure. The optimal term should not impose a financial limit on your budget when paying EMIs, while also allowing you to save a significant amount on interest payments. Most lenders usually offer this loan for a maximum of five years. As such, what becomes crucial is checking for repayment flexibility.
- Schemes and Discounts:
Special discounts and offers are something that you must keep in mind. When applying for a personal loan during festivals or certain seasons, such as the great Indian wedding season, the subhead becomes crucial. During festivals, the demand for personal loans is very high. Almost every financial institution offers a special discount on this loan product. So, if you have a solid credit profile, don't hesitate to ask your lender for an additional discount.
Who knows, the processing charge may be waived, or the lender may provide you funds at a considerably reduced interest rate?
- Hidden Charges:
We suggest spending some time looking for hidden clauses in the loan agreement if you want a low personal loan interest rate. If you find any, reconsider taking out a loan from that lender. Hidden costs are mostly related to delayed EMIs or personal loan foreclosure.
2. Show Additional Source of Income:
Since Mr Narayana's monthly income has dropped, there is a high possibility the lender will grant him a loan, but at a hefty interest rate. However, we discovered that he also owns an apartment and earns a rental income from it. As a result, we recommend that he include proof of rental income with his loan application.
Try doing what we suggested to Narayana if you find yourself in a similar predicament. The following are some of the most common secondary income sources that lenders consider.
- Rental income
- Income from trading
- Income from freelancing
2. Review Personal Loan Documents Required
The essential personal loan documents required at the time of application submission is also crucial in determining the interest rate. It is strongly advised that you go over the list of required documents attentively.
- Identity proof
- Address proof
- Income proof
- Passport size photographs
4. Work on Improving your Debt-to-Income Percentage:
It's nearly impossible to reduce your debt-to-income ratio during a difficult financial cash crisis. The debt-to-income ratio (DTI) is the percentage of your income that goes toward paying down your monthly debt. However, in this situation, the best thing you can do is strive to increase your income. When the income improves, the DTI proportion gradually falls.
How much of a loan should one take out?
The amount of loan you should take must be determined by your need. Never overborrow if you have a preapproved loan offer of Rs 5 lakhs, but your need may be met with Rs 2 lakhs. Remember, personal loans are unsecured loans. When compared to other loans, the interest rates on this sort of financing are a little higher. In simple terms, if you overborrow, it will only add to your financial burden.
To Conclude
Obtaining a low personal loan interest rate is not a difficult task. You only need to keep an eye on your credibility. If you are credible enough, the lender won't lend to your profile. Additionally, you must exercise caution while selecting a lender and a loan duration.
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