A personal loan can help you ease the stress of managing the finances. Be it an upcoming vacation, or a medical emergency, it can take you a long way. With a personal loan, you can convert your bigger spends into easy and pocket-sized EMIs.
Personal Loan is an unsecured loan that you can avail without having to pledge any collateral such as property, house, car, or other assets. When you apply for a Personal Loan, the lender takes into consideration your already existing financial history, and other factors, to determine your eligibility. The excellent features of a Personal Loan make it the best choice for times when you need quick and easy cash.
Following are some key points that will help you to understand personal loans better.
For what purposes can it be used?
Personal loans are meant for usual expenses like a wedding, renovation of your home or furnishing, children’s higher education, family holiday or to fulfill any financial requirement. You can also consider taking a personal loan to pay off bigger spends, or to pay off other loans by consolidating your debts.
Eligibility criteria
Every bank has its own criteria. It will depend on whether you are salaried or self-employed. However, the general criterion includes your age, occupation, income, capacity to repay the loan and place of residence.
Maximum loan tenure
The maximum loan tenure for a personal loan can be of five years.
Disbursal of loan amount
Generally, a personal loan gets disbursed within 7 working days of approval. Once your loan application gets approved, you may either receive an account payee cheque/draft equal to the loan amount or get the money deposited automatically into your savings account.
How much can one borrow?
The amount that you can borrow depends upon your repayment capacity and how much debt you already have. The banks look at your Debt to Income (DTI) ratio before sanctioning you a loan to see how well you can handle your monthly payments. They will compare your monthly earning to how much you spend on debt repayment (assuming minimum payments including tax). A high debt to income ratio will indicate that you are already overleveraged and will not be able to bear the burden of additional EMI payments.
If you are currently paying EMIs on other loans, then you should apply for a loan amount that has an EMI lower than 50% of your monthly income after having paid your current EMI(s) to ensure you get an easy approval.
Is there a minimum loan amount?
No, there is no set minimum amount to get a Personal Loan. This might vary from one institution to another. While some financial institutions will only give loans starting ₹30,000, other might give you loans even less than ₹10,000. You can apply for a personal loan based solely on your needs.
From which bank/financial institution should one borrow?
It is good to compare the offers of various banks before you settle on one.However, it is the key factors of the loan that you should be focusing on. Some key factors to consider when deciding on a loan provider include interest rates, loan tenure, processing fees, etc. A good way to go about this is to apply online for a personal loan. With online application, you can view offers from 10+ institutions on one platform and then choose.
How do banks decide on the maximum loan amount?
The maximum loan about will differ from one bank to another. However, some key factors determining the maximum loan amount remain the same. This includes your credit score, current income level as well as liabilities. A high credit score (closer to 900) means you have serviced your previous loans and/or credit card dues properly. This helps the lenders feel that you are a safe borrower, leading to a higher loan amount being sanctioned.
Your current income level and liabilities have a direct bearing on your repayment capacity. Therefore, if you are in a lower income bracket, you will be sanctioned a lower personal loan amount than those with a higher income. This is the same if you have a large amount of unpaid credit card bills or outstanding loan EMI.
Personal loan interest rate
Personal loans are unsecured in nature and hence can carry a slightly higher interest rate. Many leading banks and NBFCs provide personal loans starting 10.99%. However, your interest rate may depend on various factors directly linked to your creditworthiness.
Can I apply jointly with my spouse?
Yes, you can apply for a personal loan either yourself or with a co-applicant (a family member like your parents or spouse). Having a co-applicant means the loan application will be processed in a higher income bracket, making the applicants eligible for a larger loan amount. Although it should be kept in mind, that a poor credit history of either of the applicants will reduce the chances of their loan application approval.
Documents required while applying for a loan
Though the required documents vary from one financial institution to another, some of the key documents you have to provide with your personal loan application include:
*Income proof (salary slip for salaried/recent acknowledged ITR for self-employed)
*Address proof documents
*Identity proof documents
*Certified copies of degree/license (in case of self-employed individuals)
Repaying the loan
A loan can be repaid either in the form of EMIs via post-dated cheques (PDC) drawn in favour of the concerned bank or by releasing a mandate allowing payment through the Electronic Clearing Services (ECS) system. You also have the option of prepaying the loan, partially or fully, before the loan tenure ends. The provisions to do this vary from one bank to another, and you should check them when you accept the loan offer.
Loan approval process
The approval of the loan is in the hands of the loan sanctioning officer. His/her decision is solely based on the criteria specified by the bank/financial institution. Once all the necessary documents are submitted and the verification process is completed, then the loan is approved. Upon approval, the loan is disbursed within seven working days by the bank.
Balance transfer
If you are unhappy with your current lender, then you can also opt for a personal loan balance transfer. This is when the lender allows you to transfer the amount still to be paid on your loan to a new one. Here the new lender will pay off the balance amount to the present lender. At the end of the balance transfer process, you will owe the new lender payments along with the interest that is left on your loan. It will help you to benefit from the lower interest rate offered by the new lender. You might also be able to get better loan terms with the new lender.
Credit report and credit score requirement
A personal loan is an unsecured loan, therefore your financial history and credit history is important. It plays a major role during the loan approval process. Here, your CIBIL score will determine your interest rate. Where a good credit score i.e, above 700 will get you a loan at lower rate of interest.
