Ketki Jadhav
Apr 20, 2022
Listen to 7 Red Flags You Should Look Out For When Choosing a Personal Loan Lender
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Personal loans have been one of the preferred types of loans for more than a decade due to the quick and easy loan process, a requirement of minimum documentation, and no need to provide collateral. It is beneficial in emergencies and during a financial crunch. Nowadays, availing of a personal loan has become even easier as most lenders offer it digitally, which takes less than a few minutes to get ready-to-use funds in your account. However, to ensure you do not get scammed or get stuck with unfavourable loan terms, it is crucial to get the right personal loan from the right lender. If you are planning on availing of a personal loan, here are the 7 Red Flags to look out for when choosing a personal loan lender.
A personal loan is an unsecured loan that does not require any collateral and can be availed with minimum documentation. It is an easy way to get funds to take care of various personal and financial needs and can be repaid according to the terms and conditions of the lender. Since a personal loan does not require any security, the banks and Non-Banking Financial Companies (NBFCs) only check your credit score, credit history, and income and analyse your repayment capacity while approving or rejecting your personal loan application. The rate of interest on a personal loan depends upon your repayment capacity and is generally very high compared to secured loans. It typically starts at 12% p.a. and can go up to as much as 28% p.a. Unlike many other loans, there is no end-use restriction on the funds availed through a personal loan. It can be used for your child's education or wedding, purchasing a vehicle, home renovation, purchasing a smartphone, medical emergency, vacation, clearing off other loans, or any other purpose.
Click here to download our free guide to avail of a Personal Loan in India that explains everything right from the eligibility criteria to the tips to ensure your personal loan application gets approved quickly. It also elucidates how to apply for a personal loan online with a step-by-step guide so that you do not miss out on a step that can delay or reject your loan approval.
When it comes to availing of a personal loan, there are a plethora of options as almost all the banks and NBFCs offer personal loans. However, in order to get the maximum benefits of a loan, it is necessary to choose the right lender. Here are the 7 Red Flags to look out for when choosing a personal loan lender:
1. High Interest Rate:
The most obvious Red Flag that you are taking a personal loan from the wrong lender is the High Interest Rate. The rate of interest is the major deciding factor when choosing the lender because personal loans have the highest interest rates compared to other types of loans. Still, some lenders charge exorbitant interest rates that can make you end up paying a lot more than the principal amount. Remember, if the interest rate is high, your monthly repayment will be higher. Many lenders lure customers with different offers by marginally reducing the rate of interest by 0.20% to 0.50%. The NBFCs and other app-based fintech companies typically charge higher interest rates than banks. Hence, advisably, if your credit history is sound and your credit score is high, you can use it as leverage to negotiate a better rate of interest with your bank.
2. High Processing Fee:
The processing fee is another concern when it comes to finalising the personal loan lender. The banks or financial institutions charge a certain amount to process your loan application. This processing fee can range from 1% to 3% of the loan amount. If you are a long-time customer of the bank and have a good CIBIL score, you can always negotiate the processing fee. If your lender is charging you with a high loan processing fee and/or asking for a processing fee in cash before the loan approval, it is a sign that the lender could be a scammer or a bad lender that offers a high-cost personal loan, which might not be right for you.
3. No Credit Check:
A credit score represents your creditworthiness. Generally, a credit score above 700 is considered good, but having a credit score above 750 can be an added advantage in faster approval of a personal loan. Hence, you must have a good credit score to get your personal loan approved. This is the most important criteria that the lenders use to evaluate your profile. However, if the lender has approached you and offered you an instant loan without checking your credit score, it is advisable to stay away from them as it could be a scam to steal your personal information or earn income through an upfront processing fee.
4. Huge Pre-payment Charges:
It is prudent to foreclose your loans to save the interest payment on future EMIs whenever you have adequate funds. However, most banks and financial institutions charge Pre-payment charges if you want to foreclose or part-pay your personal loan. Therefore, it makes sense to choose the lender that has minimum Pre-payment charges. But, sometimes, the lenders are not upfront about the pre-payment charges. This is a Red Flag that the lender is purposefully hiding the details because the charges are too high. It is advisable not to proceed with a loan unless all the fees and charges are mentioned in the loan agreement and are reasonable.
5. Inflexible Loan Tenure:
You should beware of the lenders that have a fixed personal loan repayment tenure and do not let you choose the tenure based on your repayment capacity and requirement. These lenders generally offer a longer loan tenure that makes the monthly repayment look affordable. However, the longer the loan tenure, the more will be your interest outgo, making the loan very expensive. Therefore, if you have the repayment capacity, it makes sense to opt for a shorter loan tenure.
6. Inaccessibility:
Most scammers that pretend to be personal loan lenders contact the individuals through mass emails or SMSs. If the lender is genuine, you will not find the contact number of their customer service department anywhere. If there is only a single person or a single point contact, and no mention of the customer service contact details, it may be a Red Flag that the lender is not genuine. You will need the lender's support at various stages of your loan application and approval. Therefore, before choosing the lender, make sure the customer service is accessible during the working hours on various platforms like phone calls, emails, social media, etc.
7. Insist on Quick Action:
The genuine lender will not insist you take quick action. If the lender is giving you a short deadline to pay the processing fee or submit the documents, you should recheck whether the lender is genuine by checking the online reviews and online presence. In case the lender is not traceable online, it could be a sign you are approaching the wrong lender. These lenders can either be scammers or high-cost loan providers that want to take advantage of your situation.
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Warm Regards,
Ketki Jadhav
Content Writer
