WHENEVER there are big expenses to be met in life, like making a down payment for new home, paying fees for higher education or a wedding in the family, a personal loan comes in handy.

But getting a personal loan has become more difficult now because banks are very choosy about the borrowers to whom they lend these unsecured loans. Here is what you must remember when taking a personal loan.

High interest rates: The interest rates on personal loans are one of the highest, ranging between 14-21 per cent. Additionally, many banks charge a processing fee of 1-3 per cent of the loan amount. Even if you wish to prepay your personal loan, you would have to pay prepayment charges of 2.5-4 per cent of the outstanding loan amount.

Rate of interest in personal loans is a matter of negotiation and how the lender perceives your credit profile. If you have a good track record of repaying your other loans on time, you could bargain for a cheaper rate of interest.

Contact your existing banker: The easiest way to get a personal loan is to check with your existing banker, whether it is the bank with which you have your salary account or the bank with which you have taken your home or car loan.

This way, the formalities like getting a guarantor for your loan or the income verification process can be skipped.

In fact, many banks do not give you a personal loan unless you have an account with them, or, have already borrowed with them and have a proper repayment record of over six months.

How much can you borrow?

The size of the loan that you are eligible for would depend on your ability to repay.

According to the loans comparison portal, deal4loans.com, your EMI should not exceed 30-40 per cent of your net salary or two-three times of your income tax returns.

The interest rate that you get would also depend on the company that you work for. Those working for large, renowned companies could get a lower interest rate on their loans because they are less likely to shift jobs, and, hence, less likely to default.

Personal loans or gold loans?

Gold loans increasingly have emerged as a great alternative to personal loans since they are much faster to get, have lower interest rates and the gold in many cases would only be an idle asset lying at home and it could be put to better use for raising money.

But now, with the new regulatory changes you may not be able to get huge sums of money with a gold loan.

The Reserve Bank of India has restricted the value of loans that can be raised to 60 per cent of the value of gold. So if you are pledging gold worth Rs 2,00,000 you would be able to get a loan of just Rs 1,20,000.

The number of credit cards and personal loans that the person has taken can have an impact on the credit score of an individual.

More number of loan applications show the credit hungry behaviour of the individual and it will be viewed with caution by a lender, the next time he seeks a loan.