Personal Loan Comparison Mistakes Indians Often Make
Personal loans have become one of the quickest-growing types of credit in India. For example, they are used for medical crises, wedding costs, higher studies, house renovations, or debt consolidation. As a result, lakhs of Indians rely on them every year.
However, the reality is that while personal loans are easy, quick, and unsecured, they are also one of India’s costliest retail credit products
This guide defines the largest errors Indians commit With 50+ banks and NBFCs providing loans that all appear identical on paper, many borrowers are susceptible to common pitfalls.
This guide defines the largest errors Indians commit when comparing personal loan terms, how to prevent them, and how Money Buddha assists you in getting the best deal not only This applies not just to personal loans, but also to home loans, gold loans, business loans, and other types of loans.
Why Comparing Personal Loans in India Is Confusing
This means that the lowest monthly payment. You see the interest rate, EMI, and tenure. But in reality, Indian lenders charge loans based on a combination of:
- Interest rates (fixed or floating, risk-based)
- Processing fee + 18% GST
- Insurance charges (sometimes bundled)
- Prepayment/foreclosure conditions
- Disbursal conditions (sanction vs net credit to your account)
- Profile-based pricing (credit score, employer, salary, city, etc.)
This means that the lowest monthly payment or “lowest advertised rate” might not always be the best choice in terms of cost or flexibility.. You might overpay unless you research further.
Opting for the Lowest Interest Rate but Not APR
One of the biggest mistakes is opting for a loan simply because of the lowest advertised rate. For instance, you come across an ad:
Personal Loan @ 10.25% onwards
at the start of this sentence
This is a pilot rate being given to customers with very good profiles (CIBIL 800+, good jobs in top firms).
- There are processing charges (1–3%) + GST (18%) on top.
- Some lenders include loan protection insurance as well, padding your repayment
Example in India:
- Bank A: ₹5,00,000 loan at 11% for 5 years + 2% charge (₹10,000 + GST ₹1,800 = ₹11,800)
- Bank B: ₹5,00,000 loan at 11.5% over 5 years + 0.5% charge (₹2,500 + GST ₹450 = ₹2,950).
At first, Bank A appears more economical. But include fees and GST in it, and Bank B is the one with the lower APR (effective cost).
Smart Tip
Always compare loans based on the Annual Percentage Rate (APR), not just the nominal interest rate. If lenders don’t quote APR, work out total interest + fees + GST + insurance.
Choosing the Lowest EMI Without Checking the Loan Term
Low EMIs are what Indians adore. Borrowers scan EMI calculators and select the loan with the lowest EMI. However, this often results in choosing the longest tenure (5–6 years)
Why It Hurts
EMI gets smaller, but your total interest explodes.
Example: at the start interest:
- 3 years → EMI = ₹16,607 → Total interest = ~₹96,000
- 5 years → EMI = ₹11,122 → Total interest = ~₹1,67,000
at the start.
Smart Tip
If you have a bit more means to take slightly higher EMI, opt for a shorter tenure. In India, even lowering tenure by 1 year can save you ₹20,000–₹40,000 in interest.
Neglecting Processing Fees, GST, and Net Disbursal
Most Indian lenders are levying processing charges (1–3%) along with 18% GST. In addition, many deduct this charge directly from the disbursal of the loan.
Example
- Sanctioned loan: ₹5,00,000
- Processing charge: 2% = ₹10,000
- GST on charge: ₹1,800
- Net amount credited: ₹4,88,200
But EMI However
Smart Tip
Always verify the net disbursal amount after charges. Two loans at the same interest rate may have highly dissimilar effective costs once you factor in fees + GST.
Not Verifying Prepayment and Foreclosure Conditions
Most Indians intend to prepay loans on receiving bonuses, business earnings, or FD/insurance maturity. But there are conditions laid down by lenders:
- Lock-in period: 6–12 months as minimum prior to prepayment.
- Foreclosure fees: 2–5% of the outstanding balance.
- Restrictions on part-prepayment: Often, just 25% permitted annually
Example
For instance before the word “Example.”
Smart Tip
Select lenders that permit:
- Zero or minimal foreclosure fees
- No limit on part-prepayments
- Very short lock-in period
Voluntary Loan Insurance Acceptance
In India, banks often include loan protection insurance with personal loans.. but” with however and if you finance it into the loan, you pay interest on the premium.
Example
Insurance premium: ₹15,000 → Added to loan amount → EMI calculated on ₹5,15,000 instead of ₹5,00,000. Over 5 years, you pay interest on the extra ₹15,000 too.
Smart Tip
- Ask if insurance is optional.
- Compare standalone term insurance outside.
- If you take it, pay the extra cost upfront instead of borrowing it.
Misunderstanding Fixed vs Floating Rates
Most personal loans in India are fixed loans, but a few NBFCs have floating loans tied to the RBI repo rate. Borrowers take the fixed = fixed forever” assumption, but a few lenders reset fixed rates every 2–3 years.
Smart Tip
- Therefore, at the start.
- If floating, inquire about benchmark (repo, MCLR, etc.) and reset frequency.
- Ask how EMI/tenure will be affected if rates increase.
Submitting Application to Too Many Lenders at Once
Each time you apply, lenders obtain your CIBIL report and → hard inquiry. Too many As a result,at the start.by 10–20 points each.
Smart Tip
- Make use of platforms (such as Money Buddha) that perform soft checks initially
- Pre-select 2–3 lenders rather than applying everywhere.
Not Verifying CIBIL Score First
interest or rejection.
- In fact, a score of 750+ usually qualifies you for the best rates
- Keep it, its already a transition. high interest or even rejection.”
Smart Tip
- Get a free CIBIL report once a year.
- Settle credit card dues.
- Prevent cheque bounces and delays.
- Maintain credit usage <30%.
In fact, at the start. by 1–2%, saving lakhs.
Taking More Than You Should
Banks give more funds than you applied for. Many borrowers do this out of temptation.
“But” with However. RBI guidelines advise keeping EMIs <40% of net monthly income.</mark>
Smart Tip
Take only what you need, not the maximum approved.
Assuming Pre-Approved Guaranteed
In India, banks send SMS/email messages with: “Pre-approved personal loan in 2 hours!” But the final sanction is subject to document verification and income stability.In addition at the start.
Smart Tip
Treat pre-approved as invitations, not promises. Still compare with other lenders.
Overlooking Alternatives to Personal Loans
Nevertheless at the start
- Gold Loan (secured, lower rates, quick disbursal)
- Loan Against FD/Property (much lower rate)
- Top-up on home loan (less expensive for large sums)
- Education Loan (tax benefits under Section 80E)
Failure to Read RBI Guidelines and Charges
A large number of Indians do not read sanction letters. For example at the start.
- Penal interest (2–4% additional on delay)
- Bounce charges (₹500–₹1,000 for every defaulted EMI)
- Collection charges
Smart Tip
Always check the sanction letter carefully. The RBI makes sure everything is clear, so ask for a list of all the charges.
The Role of Money Buddha: Smarter Loan Comparisons for Indians
Money Buddha helps Indian borrowers avoid making these mistakes.
Instead at the start. but a smart tool that shows you the real cost of borrowing.
How Money Buddha Makes Loan Comparison Simple
It shows the Annual Percentage Rate (APR), not just the interest rate.
Moreover at the start. including GST, processing fees, and insurance.
It matches loans based on your profile,
- like your CIBIL score, income, job, and city.
- It helps you avoid wasting time on loans you’re not eligible for.
Soft-Check Eligibility
- Without hurting your credit score by not doing hard credit checks
Clearly explains prepayment and foreclosure rules
- Such as lock-in periods, fees, and part-payment policies.
Cross-Product Comparisons
- like personal loans, gold loans, home loans, education loans, business loans, and loan top-ups.
- Saves you from resorting to a costly personal loan when a lower-cost product is available that fits better.
Balance Transfer & Top-Up Options
- Demonstrates savings achieved by shifting an existing loan to a lower-rate bank or lender.
RBI-Compliant, Data-Safe
- Operates only with RBI-regulated banks and NBFCs.
- Adheres to strict data privacy procedures.
Final Word
Personal loans have become one of the quickest-growing types of credit in India. From financing a medical crisis, wedding costs, higher studies, or even debt consolidation, lakhs of Indians rely on this form of credit every year. The truth, however, is that while they are quick and convenient, they are also one of India’s costliest retail credit products.
Therefore at the start. (for example, APR, tenure, disbursal condition, and prepayment facility), you can save significant money.
And with In addition .everything by yourself. It provides you with an open, profile-matched, RBI-approved comparison among personal loans and other loan products so that you can borrow smarter, quicker, and securely.
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