How do I choose the right personal loan?

I plan to take a personal loan for my sister’s wedding. Different apps and banks are showing me completely different interest rates. Some advertise 10.5%, while others offer 14% or even more. Why is there such a big difference? How do I know which one is right for me?

– Priya Mehta, Ahmedabad

Great question, Priya, and one that highlights a common confusion. On the surface a personal loan looks like a simple product. But the reality is that every interest rate you see is tied to multiple factors. Let’s break them down so you can make a confident decision.

1. Credit score: the foundation of pricing

Your CIBIL score or credit history is one of the biggest determinants. If your score is above 750 you’re likely to be offered lower rates because lenders see you as less risky. On the other hand, scores below 650 generally attract higher rates.

2. Income and job stability: how lenders judge risk

A salaried professional with a stable monthly income from a reputed company often gets better terms than someone with irregular or unpredictable earnings. For self-employed individuals, lenders may ask for additional documents such as GST returns or business bank statements.

3. Lender type and target audience

Banks, NBFCs and fintech firms all work differently. Banks are usually conservative in lending but usually provide the lowest interest rates for customers with strong credit profiles. NBFCs and fintech players, on the other hand, may charge slightly higher rates but offer wider eligibility and quicker processing. Neither is better or worse — it’s about balancing cost with convenience and accessibility.

4. Hidden charges

Most people only compare the headline interest rate and ignore:

• Processing fees (typically 1–3% of the loan amount)
• Documentation charges
• Prepayment penalties

Add these up and a loan that looked cheap at first becomes costly.

5. Loan tenure: short vs long game

Shorter tenures come with higher instalments but lower overall interest payments. Longer tenures reduce your monthly burden but increase the total interest you pay. The ‘right’ tenure depends on your ability to repay, not just the advertised rate.

So, how do you decide?

At Fintifi, we recommend comparing loans not just by their interest rate but by the effective cost of borrowing: EMI + hidden charges + tenure impact.

Here’s a quick rule of thumb: If the difference in interest rate is 2% or more and your loan tenure is at least two years, switching or choosing the lower rate is usually worth it. If the difference is less than 1%, focus on choosing a flexible, reliable lender will good service quality rather than chasing a marginally lower rate.

Remember, the cheapest loan isn’t always the smartest one. The right loan is one that balances affordability, flexibility, and peace of mind.

Aryan Makwana is co-founder of Fintifi.