10 Best Personal Loans in India 2024 | 5paisa (2024)

Introduction to Personal Loans in India

Personal loans are mostly always unsecured and therefore have been one of the biggest growth engines for the asset books of Indian banks (especially for private banks) over the last few years.
While trying to entice customers to take their personal loans, banks normally throw in incentives like pre-approved loans, minimal documentation loans, and automatic top-ups as sweeteners.
Personal loans may look simple and attractive, but before availing of one, individuals must do some basic checks. For instance, it is not just the rate of interest, but other factors like the processing fee, foreclosure charges, loan tenure etc. that you need to consider before accepting or rejecting an offer from a bank or NBFC for a personal loan.

Top performing personal loans in India

The table below captures some of the latest base rates for the best personal loan in India.

The rates shown above may appear very attractive in a scenario where interest rates are on the rise, but in reality, this is not the rate at which people get these loans.

The figure shown above is usually the base rate, on top of which there are other factors that determine the final rate that the bank would charge a customer. These include the credit standing of the individual, his or her past payment record, past relationship with the bank and the tenure of the personal loan that matter.

Personal loans are mostly always unsecured, so banks and non-banking finance companies (NBFCs) often have to do their own due diligence to ensure that the prospective customer does not delay payment of EMIs.

So, how does one choose the best personal loan in 2024?

How to choose the best personal loan for your needs

It is not just about the rates; which is one of the factors that go into the personal loan decision. There is a lot more that a customer needs to check before settling for the choice of best personal loan in India.

• One must compare all the offerings across by scheduled and non-scheduled commercial private and public sector banks and NBFCs. Normally, banks offer loans at lower rates as their cost of funds are lower. But, only a base rate is defined and there’s nothing like a standard rate. Banks prefer loyal customers so it is best to focus more of one’s relationship with a single bank than to spread it. If one’s relationship with a bank is long and deep and if one’s credit score is good, one can bargain for lower rates of interest rates on your personal loan.

• The key to getting personal loans easily and at attractive rates is also to keep a good and steady credit score (CIBIL score) of 750 or above, which is considered an ideal number. Having a high CIBIL score substantially improves a borrower’s chances of getting a loan. One secret of a good CIBIL score is to not overstretch on debt. All EMIs jointly must be less than 35-40% of take home pay. A borrower must pay credit card and EMI bills on time and should avoid cheque bounces as they hamper your CIBIL score. High borrowing levels also have a bearing on one’s credit score.

• One should always compare the processing and other charges. The processing fee typically varies from 2% to 5% of the loan amount. The lower the better. Some banks even charge a fee to give a sanction letter and that is part of the cost. A borrower can bargain for lower processing charges, if one finds it too high or one can start negotiating with a competitor. A borrower shoud look for personal loans without foreclosure charges as they can range from 2% to 4%. The fee are charged on the outstanding principal amount. Prefer personal loans that offer the facility to foreclose the loan early without charges.

• A borrower should check if the tenure is what they want. Tenors of most personal loans range from 1 year to 7 years. Longer the tenure, the lower the EMI, but the downside risk is that the overall interest payout will be much bigger over the tenure. It is best to try and finish the personal loan by 3 years so that you get time and also do not end up paying too much interest.

• A borrower should check if the personal loan process is quick and digital. If it is pre-approved, then the personal loan is disbursed in less than 72 hours, including verification.

Understanding interest rates and repayment terms

When a borrower avails of a personal loan, there are a couple of things he or she needs to understand very clearly, viz. interest rates and the repayment terms.

• Being unsecured, personal loans, being unsecured command higher interest rates compared to secured and asset backed loans. The final rate will depend on the relationship with the bank, multiple banking relationships and also on one’s credit score (CIBIL score). If one has a good track record and good CIBIL score, one can bargain for better terms on the loan.

• Repayment of personal loans is done on EMI (equated monthly instalment) basis. This monthly EMI includes an interest component and principal component. In the initial months, it is the interest component that is higher and later on it is the principal component that is higher in the EMI.

Occasionally, the borrower may want to repay the loan due to intermittent cash flows. In such cases, the borrower should check if there are any prepayment costs. Ideally, ensure that the loan carries zero prepayment charges. That is the best personal loan.

Benefits of applying for best personal loans online

Thanks to online websites and digital loan syndicators, it is now possible to compare the best personal loan rates online. There are websites that will syndicate deals from various banks and NBFCs and give one a comparison based on interest rates, tenure, upfront processing charges, foreclosure charges etc. This helps a borrower take a well informed decision on which loan to choose and why. Normally, the choice of personal loan is based on a mix of all the above factors and availability of the loan; in most cases.

However, there is a caveat to keep in mind in any such comparison. What one gets to see in the online comparisons would only be the shelf rates or the rack rates that the bank discloses. The actual rate would be based on one’s credit assessment and a one-on-one discussion with the bankers, where one seeks the top performing personal loan.

Importance of good CIBIL score for personal loan approval

The CIBIL Score is a barometer of the creditworthiness of the borrower. A good CIBIL score (750 and above) is a sign of a person who manages finances well and is considered creditworthy by lenders. It is much easier for such persons with a good CIBIL score of above 750 to get personal loans. Also, such people can get loans at lower rates and with lesser paperwork.

CIBIL Score is not the only criterion that decides whether banks would grant the loan. There are NBFCs that grant loans to high risk borrowers, but it comes at higher rates of interest. That is why CIBIL Score plays a major role when banks offer interest rate and other terms of a personal loan. After than you can go ahead and select the top performing personal loan.

Common mistakes to avoid when applying for a personal loan

There are a few basic mistakes to avoid in personal loans. Firstly, avoid longer tenure as you end up paying more interest. Do not ignore prepayment costs as it may make an exit expensive for you. Avoid going for a personal loan without proper comparative evaluation of the various alternatives available in the market. Lastly, apply the affordability test for your EMIs. All your EMIs put together must not be more than 40% to 45% of your take home pay. Otherwise, you may end up straining your finances unnecessarily.

Also read about: Best Car Loan in India 2024

Conclusion

There are pros and cons to personal loans and the rate of interest is one of the factors that you should look at before borrowing. One golden rule is to always reduce high cost borrowings like credit cards and personal loans to the extent possible as they hamper your ability to achieve your financial goals in the long run.