Personal loans are handy when you need some urgent cash. However, these loans are tricky and you need to know as much as possible about their basics before opting for it.

Cheapest loan

Lenders charge very high interest rates ranging from 14 per cent to 24 per cent for personal loans. Compare in-terest rates and get the complete picture by understanding the annualised int-erest rates for each offer. Then figure out the total amount of repayment, you need to pay for all the offers before opting for the cheapest.

Processing fee

You need to keep in mind processing fee and other fees that will be levied when you apply for personal loan.

Prepayment penalty

Ask upfront if there would be any penalty for prepayment of the loan. Hence, it is important to know if your personal loan offer allows part prepayments. If you know when you can actually start prepaying, then you can calculate the cost that you would incur for the same.

EMI and tenure

Evaluate all loan offers. The first condition for loan offer selection is the total money outflow during the entire tenure. The second factor is the EMI. A loan offer with a lower EMI and a longer tenure may seem attractive, as it could be easy on your purse strings. However, not all such loans prove to be cost effective in the long run. Hence, first calculate the total loan cost and then try to opt for a higher EMI, which could be paid easily.

Credit history

Especially in the case of unsecured loans, your credit history, which is recorded by CIBIL (Credit Bureau India Ltd) plays a critical role in your loan application being accepted. A good repayment track record ensures not only an instant loan approval but brownie points in the form of more attractive interest rates.

Eligibility

The eligibility criteria and their specific details may differ from bank to bank based on their perception of the risks associated with given out personal loans. However, nearly all banks divide the potential borrowers into three categories:
* Salaried individuals
* Self employed individuals
* Self employed professionals.
Other factors which are taken into consideration are, age, residence, work experience, repayment capacity, and past obligations.

Documents needed
Typically, financial institutions would require proof of identity, residence, income and also three to six months of your bank statements. Some banks also require guarantors and the same set of their documents.

Alternatives
You could also utilise investments you might have made so far, like shares, fixed deposits, gold and insurance policies. You can pledge them as collateral and obtain a loan. The interest rates would definitely be lower compared to personal loan.

Personal loan vs other borrowing options

Personal Loans are essential, but it is advisable to know the intricacies
before taking the plunge.

Personal Loan Unsecured Loan
Between 15%- 25%
* EMIs are higher because of high interest rate
w Maximum loan eligibility is determined primarily by an individual’s income
* Tenure from 1 to 5 years.

Credit card Cash Advance
Unsecured Loan

For rollover credit (amount allowed to be rolled over and paid later) interest can go up to 35%

* Minimum monthly payments can be made. However, the interest keeps on adding up.
* Maximum amount is determined primarily by the credit limit on the card.
* Can be paid off monthly.

Loan Against Property
Secured Loan

Between 12%- 15.75%

* Since the rate of interest is lower, frequently LAP Equated Monthly Instalments (EMI) turns out cheaper.
* Maximum loan eligibility is determined primarily by the value of the property and income.
* Maximum tenure could be upto 15 years.

(The writer is CEO of bankbazaar.com.)