Personal loans have become one of the most often used types of financial instruments. Individuals take out unsecured loans from a bank to meet personal requirements. Because borrowers do not put up any collateral, such as property or gold, to obtain such loans, they are not secured against any asset.
Personal loans normally have a higher interest rate than other types of loans because they carry a larger risk. Income, credit score, age, and employment history are all factors that influence your capacity to obtain a personal loan. Personal loans are commonly used in clothing for upgrading a house, schooling, vacations, and weddings, among other things.
As of January 2021, India’s total working population was anticipated to be 400.7 million, with 200 million credit-active individuals in the retail credit sector.
Before applying for a personal loan, it’s important to keep the following points in mind.
1. What is the Purpose of a Personal Loan?
Have you already begun making plans for how you will spend your money? Take a moment to consider whether you truly require a loan. If you know why you’re getting a loan, you’ll avoid borrowing more money than you need and spending money on things you didn’t intend to buy.
2. Will I Be Accepted?
You’ve determined that a personal loan is the best way to receive the money you need, but have you considered the odds of your loan is approved? Make an assessment of your financial actions and eligibility before applying for the loan.
Wait a while before asking for a personal loan if you don’t have a decent credit score or don’t match the qualifying criteria.
3. What amount will I receive?
Since it is an unsecured loan, the size of your personal loan will be determined by a number of factors, including your salary, existing liabilities (such as outstanding loan EMIs, credit card dues, and so on), and your current credit score.
The typical personal loan amount provided to a borrower is between 50 and 60 percent of the borrower’s annual income.
4. How much will I be able to afford?
It’s important to consider how much of a loan you can afford to repay. Here’s a way to see if it’s affordable:
- Examine your month-to-month financial flow.
- Determine how much money you have available to pay off a new obligation.
- Determine whether you have any money left after paying your monthly payments and covering other expenses.
- Look for places where you may save money and add it to your monthly instalment payment.
5. What are the documents needed?
When you apply for a personal loan, the lender will want documentation to confirm your identification and monthly cash flow. The following are the basic documentation that the lender requires:
- a) Identity Proof: Aadhar Card, Voter ID Card, Passport, Driver’s Licence, PAN Card (optional)
- b) Address Proof: Monthly bills (electricity, gas), Aadhar Card, Passport, Ration Card
- c) Income Proof: Bank Statements, salary slips, ITR (Income Tax Return)
6. Is the interest rate something I can afford?
Most private banks will provide loans with terms ranging from 12 to 60 months and interest rates starting at 10.25 percent per year. To determine whether you can pay the interest rate, you must first calculate your EMIs and compare personal loans from the various lenders or banks.
7. What are the other charges that I should be aware of?
While applying for a personal loan, there are a few charges that you should be familiar with:
- a) The Processing Fees: Compare the processing costs charged by various banks when considering a personal loan. Some lending banks impose a set processing fee upfront, while others charge anywhere between 0.25 percent and 3.03 percent of the loan amount.
- b) Late Payment Fees: If you are late with your EMI payments, your bank may charge you late fees. Most banks charge a late payment penalty of 2% per month.
- c) Pre-payment or Part Payment Fee: Many lenders allow you to pay off your loan early, but the terms vary. Some lenders, on the one hand, will enable prepayment after a 12-month lock-in period, while others will only allow prepayment in multiples of the EMI.
Over to you…
Choosing a personal loan is entirely up to you, however, you may find yourself in a situation where a loan would be really beneficial. One simple idea is to read the fine print and make sure you understand all of the terms and conditions.