However, what matters (or at least should matter) the most for any borrower is the rate of interest levied by the lender. Being unsecured, a personal loan typically attracts a higher rate of interest. Additionally, the interest rate on a personal loan usually remains the same during the entire tenure.
Therefore, a slight difference in the rate of interest can lead to a significant difference in the overall cost incurred by the borrower. Let us understand how this works.
A difference of 2%
Suppose you plan to take a ₹5 lakh personal loan for a period of three years. The rate of interest, if it ranges between 11% and 13%, can lead to a significant difference, as shown in the table below.
(When ₹5 lakh loan is taken for 36 months)
When the interest is 11%, the total interest would be ₹89,296. It rises to ₹93,568 when the interest becomes 11.5%. When the lender charges 13% on this loan, the total interest would spike to ₹1,06,491.
As shown in the above calculation, one would have to pay an additional amount of ₹17,195 in interest solely because of a 2% difference in interest rate on a small amount of ₹5 lakh.
Now, one can imagine how big the difference would be when the loan amount rises proportionately.
However, it is equally important to keep in mind other considerations:
>> Processing charges: It is imperative to ensure that the processing fee is not excessive, as it can negate the gains arising from lower interest.
>> Hidden cost: You also need to be cautious of the hidden charges that the lender may levy.
>> Customer service: It is also vital to be careful of the lender’s customer service. If the overall experience is awful, it may not make sense to opt for the lender only to save a little extra.
Disclaimer: Mint has a tie-up with fintechs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
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