Things to Consider Before Deciding the Personal Loan Amount

Last Updated : July 9, 2020, 11:23 a.m.

Although most apply for a personal loan to meet their instant needs, a few plan their loan journey to fulfill their long term goals easily. Goals like marriage and education can be planned effectively with a personal loan. Within planning, the important part is the personal loan amount. You should decide it carefully so that you can fulfill your needs and pay the loan EMIs on time. A lot of us don’t do much due diligence on the personal loan amount and end up paying much more. If you want to avoid such a situation, consider the following factors before deciding the personal loan amount for you. Let’s begin.

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Figure Out Your Requirements First

The first thing you should do before deciding the personal loan amount is to assess correctly the funds you need. While assessing the fund requirements, minus the unnecessary ones.

Check Out Your Savings When Applying for a Personal Loan Amount

Savings is an important point to consider when deciding the personal loan amount. You may be eligible for higher loan amounts, but they add interest liability for you to bear. What you can do though is lessen the interest payment. This is where savings can help you do so. Proper utilization of the savings will ensure a reduction in the loan requirement as well as the overall interest outgo. Ensure you don’t utilize the entire savings, keep a handy amount with you and try to accumulate it further. So, check how much savings you have, how much savings you can use for your purpose and then decide the loan amount.

Interest Rate

The interest rate determines the extent of repayment you will end up doing to the lender. Greater the rate of interest higher will be the EMI and interest outgo and vice versa. So, the message is clear – Compare the interest rate of different lenders and see the repayment that you come across with each of them. A substantially lower rate of interest will give you extra space for additional personal loan amounts. Personal loan interest rates range from 10%-25% per annum on average.

Processing Fee

It is a one-time fee that lenders charge to process the loan amount. On average, it can be around 1%-2% of the loan amount plus goods and services tax (GST), which at the moment is 18%. The thing with the processing fee is that lenders deduct the same from the applied personal loan amount. So, the disbursal amount you get in your bank account is lower than the applied amount. But the lender will charge interest on the applied amount. Not many may be aware of this. So, if you need INR 5 lakh and the processing fee is INR 10,000. You will get INR 4,90,000. If you don’t have further savings, apply for a slightly greater loan amount so that you get INR 5,00,000 from the lender. So, do the required calculations and decide the personal loan amount accordingly.

Tenure

Tenure also has a bearing on the repayment you do towards a personal loan. A personal loan can be given for a maximum of 5 years, although a few lenders can give you more time. Tenure bears an interesting relationship with your repayment; longer the tenure lower will be the EMI and greater interest outgo and vice versa. So, check the effect of the personal loan amount you are looking for at different tenures. An example below will help you understand better.

Example – You are looking for a personal loan of INR 6 lakh. If you get the same at a 15% interest rate for 5 years, the EMI and interest outgo will be INR 14,274 and INR 2,56,437, respectively. In case you have a savings of INR 1.5 lakh with you, you can use half of that and apply for a loan to cover the remaining amount. If you use this option, the loan amount will reduce to INR 4.5 lakh. This will reduce your EMI to INR 10,705 and interest liability to INR 1,92,328. You can further capitalize on a personal loan by going for 4 years instead of 5 years. If you do this, the EMI will increase to INR 12,524 but the interest will reduce substantially to INR 1,51,144.