Interest rates on personal loan is the highest, when compared to any other loans. The only other loan, call it loans if you wish, is outstanding amount on credit cards, which come at an exorbitant interest rate of around or more than 36 per cent per annum.
A simple way to get the cheapest interest rate on personal loans
There are comparison portals that tend to offer an interest rate comparison. So, if you leave your number, they will call you back, with the best interest rates from banks, where they have a tie-up.
But, there is a problem here...
Now, let us assume that you have the best interest rate from this comparison portal and you have shortlisted a bank with 12 per cent interest.
Invariably, if the interest rate is low, there is a hefty pre-payment charge. For example, HDFC Bank charges a pre-payment charge of 4 per cent on the outstanding loan amount.
Bajaj Finserv and Standard Chartered Bank do not have a pre-payment charge on the personal loans.
Not only this, there is another catch as well and that is insurance. Personal finance is not a secure loan for banks. For example, home loans are mortgaged loans and have your home as a security. On the other hand auto loans have your vehicle as a perfect hedge from defaults. Personal loans have nothing.
So, while earlier there were guarantors for personal loans, that has been done away with. Now there is an insurance, that has to be paid by the borrower. So, if anything were to happen to the borrower, the bank makes good from the insurance company.
So, there are many banks, whose insurance component is rather high. So, apart from pre-payment, processing, you also need to ask for the insurance charges. All this would be built into your EMI.
So, if a comparison portal guy calls - check the insurance amount, prepayment charges and the processing fee. Of course, interest rates also remain paramount, when taking a personal loan.
What would the personal loan interest rate depend upon?
Your personal loan interest rate would depend on a number of factors:
1) Where is your salary account?
Let us say your salary account is with ICICI Bank. Chances are very bright that you would get a much lower interest rate on personal loan, as compared to individuals who are not banking with the bank.
2) Your credit rating
Interest rates on personal loans are not like home loans. They could very from individual to individuals and would depend on the bank.
The bank is most likely to hike the interest rate, if your Cibil credit score is weak. So, make sure that you have a solid credit score before opting for a personal loan.
Opt for a personal loan, only if you have exhausted all options. Compare interest rates, insurance and processing charges. Personal loan interest rates vary and hence make sure that you are making the best choice possible.