What is a Personal Loan?
A personal loan is a sum of money that one can obtain for various purposes. It can be used for debt consolidation, home upgrades, or organizing a dream wedding. Personal loans are offered by almost every financial institution. The borrowed money must be repaid along with interest over a specific time. Financial institutions also charge fees for processing your loan.
How does Personal Loan work?
When you take out a personal loan, you usually obtain the money in one lump sum and repay it over time with predetermined monthly installments. The terms and conditions, on the other hand, differ per financial institution.
Personal loans are unsecured forms of loans with flexibility in end-usage. It offers a term ranging from 12 to 60 months. If the borrower chooses the shorter tenure, the monthly installments would be higher. Opting for a longer tenure, on the other hand, provides you with a lower EMI amount.
Features of Personal Loans:
No Collateral Required:
Personal loans are unsecured forms of financing. Borrowers are not required to put their property or assets as collateral or security. Financial institutions offer this loan based on the personal profile of the applicant. To avail of this loan, you need to have a strong credit history, stable income, stable occupation, and a few more. Apart from this, the lending institution also looks for the age of the applicant. Individuals over the age of 60 years are not preferred by financial institutions. This is because the increase in age will result in a decrease in earning potential.
Flexible Usage:
One of the best parts of this loan form is that it offers flexibility in terms of its usage. Borrowers can use this loan form for a variety of purposes. It can be used to finance child higher education, medical emergencies, vacation, home decor and renovation, and many more. Lending institutions do not put any restrictions on the borrowers regarding the usage of this loan form.
Flexible Tenure:
Financial institutions provide their customers to choose the repayment tenure that fits their budget. Generally, this loan is offered for a period ranging between 12 months and 60 months. Though the loan offers flexibility to customers, in some instances, the flexibility tenure may depend upon several factors, such as age. For example, if your age is 58 years, your lending institution may not offer you a repayment tenure of 60 months. This is because earning potential will decrease with an increase in age.
Minimum Paperwork:
Financial Institutions are not required to assess the value of the assets as they do in secured loans. Personal loans are approved with a minimum of documents. The borrowers need to produce their identity proof, address proof, income proof, and a few more to get their loan approved.
Quick Disbursal:
The turnaround time for a personal loan disbursal is very less. If you have any pre-approved loan, the amount can be disbursed within a few minutes. Once the financial institution is satisfied with the submitted documents, it immediately disburses the loan amount into the customer’s account. One can apply for this loan either online through the website or by visiting the branch in person.
Flexible Loan Amount:
The loan amount is sanctioned based on the applicant’s monthly income, repayment capability, age, occupation, employer reputation, and many more. Financial institutions offer this loan of the amount as low as Rs. 50,000 to as high as Rs. 5 lacs.
The loan amount, however, may vary from one lending institution to another lending institution.
Factors affecting Personal Loan eligibility:
Income:
The most important factor in determining the eligibility condition on a personal loan is your income. Individuals with higher annual incomes are more likely to repay their debt in full and on time than those with lower incomes. A borrower’s high income gives lending institutions more confidence in his or her ability to repay the loan.
As observed in the financial industry, applicants with a high and regular income tend to get away with low rate interest on personal loans. However, lending institutions may charge higher interest rates on low-income borrowers to protect themselves from associated risks.
Credit History:
Nowadays, it is a common fact that credit history plays an important part in loan disbursals. However, when it comes to personal loans, your credit history is even more important because it not only determines loan approval but also affects the rate of interest. The credit history indicates an individual’s financial success in terms of past loans or other forms of credit. Each timely debt repayment will improve your credit history; however, late installment payments or defaulting would have a negative impact.
Occupation Status:
As personal loans are unsecured forms of financing, lending institutions look for a variety of criteria to establish trust in borrowers, one of which is your current organization’s reputation. The reasoning behind this approach is straightforward. Borrowers who work for a reputable company are thought to be more responsible and financially stable for making timely installment payments. Financial institutions may have more lenient lending terms and conditions for borrowers who work for specific organizations.
Debt to Income Ratio:
Assume you work for a well-known employer and make a good salary, but a significant portion of your income is spent on loan installments. In such circumstances, all of your previous debts will almost probably affect the interest rate on any future personal loan borrowings.
Divide all of your debt obligations by your total income to obtain your debt-to-income ratio. A larger debt-to-income ratio indicates that the borrower has more responsibilities, and the lending institution may levy a higher rate of interest on your loan just to safeguard themselves.
Relationship with Lender:
It’s a human tendency to gain a feeling of trust in one another through extended interactions, and the same applies to you and your financial institution. When lending to an existing and trusted customer, lending institutions are normally more flexible with the rate of interest. This trust, however, does not develop overnight.
Maintaining customer loyalty involves a lot of time and prudent behavior on the part of the lending institution’s customers. When financial institutions recognize your commitment to their organization, they are more inclined to give you a better loan term than newer clients.
Factors to consider when seeking a Personal Loan:
Interest Rate:
It is crucial to consider the rate of interest when applying for a personal loan. The interest rate depends upon numerous factors such as your age, income, employment status, and a few more. The loan EMI is determined by the interest component that has an impact on your monthly budget and long-term financial health. As a result, make sure you choose the lending institution that offers the best possible interest rate on a personal loan.
Repayment Tenure:
Usually, the repayment tenure for personal loans is between 12 months and 60 months. However, choosing the short tenure loan is better. Though the shorter tenure increases the EMI burden, you end up paying a lower interest component when compared to a longer tenure loan. Therefore, choose tenure after analyzing all your financial needs and your income. This way, you can effectively tackle with your budget.
Fees and Charges:
When you take out a personal loan, lending institutions levy processing fees and other charges in addition to interest rates. The loan processing charge is a one-time fee that is calculated on a specific percentage of the Personal Loan. These charges differ from one lending institution to another institution. When applying for this loan, a higher processing cost affects your overall cash outflow. Therefore, when choosing the lending institution, compare the processing fee and associated charges.
Repayment Flexibility:
Besides the aforesaid factors, consider whether the lending institution gives you the option to repay your debt sooner and at what cost. The repayment flexibility can help you pay off the debt sooner and provide relief during difficult times. However, it is necessary to practice financial discipline in order to pay back your loan on time and keep your financial health in good shape.
Customer Service:
You don’t want to have a bad experience when availing of a personal loan in your tough times, do you? As such, be sure the financial institution’s customer care unit is up to the mark. The customer care executives can also assist you in keeping track of your debt, helping you to better manage your finances.
Terms and Conditions:
Make sure you are reading the terms and conditions thoroughly before making a decision on the lending institution. This will prevent problems in the future and offer a pleasant, stress-free experience.
To Conclude:
Personal loans are beneficial in some situations. When many people cannot afford to pay cash for a large purchase, obtaining a loan becomes necessary. When you obtain this loan, it is crucial to know exactly what you are consenting to. You must also have a strong plan in place to repay the debt as per the terms of your agreement with the financial institution. Make sure you are exploring the options available in the market before deciding on the lender.
Get more information from the official website.
