Understanding Personal Loans For Better Investment Decisions

There are specific differences between short and long-term personal loans and depending on your requirement and repayment capacity, opting for the better choice is important. Let us observe some of the differences in order to help you make an informed decision.

Loan tenure 

Short-term personal loans usually come with tenures starting from 3 months. Payday loans, which are also a form of unsecured loans, associate with a 1-month tenure – the loan has to be paid by the applicant in full upon receiving his or her paycheck. There are many lenders that offer short-term personal loans in several Indian cities, with most lenders being Fintech Lending companies or private finance companies. 

Note that top banks do not usually offer short-term personal loans – unsecured loans from banks usually have tenures starting from a minimum period of 6 months. That said, there are Peer to Peer (P2P) lending platforms that claim to specifically offer short-term personal loans with maximum tenures stretching up to 1 year.

As for long-term personal loans, loan tenures can extend up to 5 years. These are the more popular loan product, offered both by banks as well as Fintech lending companies. By applying for this product, you can close your loan before your tenure matures, usually at a nominal fee amounting to about 1-2% of the outstanding loan balance. Longer tenures attract lower repayment amounts while short tenures attract higher monthly repayment amounts.

Interest Rate 

The rate of interest is usually higher in case of short-term personal loans. Personal Loan interest rates usually start from 11% per annum but can go up to 30% per annum. Lenders use risk-based pricing to fix the annual rate of interest on loan applications. 

In accordance with this model, high-risk consumer profiles are usually offered a higher interest rate as lenders account for various parameters to cover the cost of risk in the possible event of a default. The interest rate is fixed, meaning that it does not change over the course of the tenure.

Eligibility 

The methods used by lenders, regardless of what type of loans they offer, remains largely the same. As such, individuals with lower-than-prime credit scores find it easier to qualify for short-term personal loans from Fintechs or P2P platforms. This is mainly because private banks that offer long-term unsecured loans have a more stringent eligibility framework with reference to parameters such as the credit score, repayment history, and debt-to-income ratio. 

If we are to make a direct comparison, qualifying for a personal loan from bank would require you to have a credit score of at least 750, as against a score of as less as 575 being accommodated by P2P lending platforms and Fintech companies. 

The author is the Founder and CEO at Qbera.com