A Guide To Personal Loans

An increasing number of Indian households are considering taking credit to fulfil their financial needs. From making big-budget purchases to meeting emergencies, getting a Loan is a sought-after choice. Now, there are various types of Loans in the market. They are meant to fulfil specific needs. For instance, you get credit for financing a car, house, wedding, vacation, or medical emergency.

But if you do not wish to restrict yourself with a specific purpose, Personal Loan is an ideal choice. It lets you decide the end-use based on your discretion without intimating the lender. Also, you need not submit any collateral to avail of it. This makes it convenient for everyone. But several aspects determine your eligibility and affect Loan approval. You should understand them and prepare accordingly. Let us know them better:

Eligibility criteria

This is the first aspect to understand for effectively planning your Loan application. Although the eligibility for Personal Loan differs from bank to bank, the general parameters remain the same. They include your age, income, employment, existing debts, credit score, etc. The lending amount, tenure, equated monthly instalments, and interest rate gets decided based on them. Hence, you should check the same before applying.

Loan tenure

Lenders sanction the Bank Personal Loan for a period of one to five years. The EMI's get spread out for the duration, making it easier to repay flexibly. Although you have a longer time to repay, you need not stretch the tenure to five years. You may choose to shorten it as much as possible to pay off the Loan faster. This reduces the interest pay-outs and overall Loan burden. On the other hand, a longer tenure reduces the EMI amount but increases the Loan cost.

Borrowable amount

You get up to Rs. 25 lakh as the Loan amount. This is ideal to fulfil diverse expenses without compromising. But it is not necessary to take up the maximum amount. Moreover, lenders finalise it based on your eligibility. Instead, you should decide the borrowable amount depending on your affordability. Check the Personal Loan interest rates it attracts and choose accordingly. Lenders let you calculate this with tools on their websites.

Interest rate and charges

Being unsecured, this Loan type does not require collateral submission. Hence, lenders need other means to protect their interests. Hence, they charge a higher interest. At present, most leading banks charge up to 12% interest. But this also depends on specific eligibility factors. Therefore, never go by the quotation. Check it against your eligibility. You get to do this conveniently with eligibility and an EMI calculator.

Besides interest, banks also levy specific changes throughout the Loan application process. They include documentation expenses, processing fees, administrative charges, etc. Check this carefully to estimate the accurate Loan cost. The information is accessible on their websites and the Banking app.

5 Factors That Affect Personal Loan Approvals

Earlier, getting financial assistance caused hesitancy in the minds of people. The burden of obligation stressed them out. But getting credit is no longer considered the last resort. Most applicants consider it wise to safeguard savings and get instant funds to meet financial demands. Whether it is for making big-budget purchases, financing emergencies, or fulfilling financial obligations, getting a Personal Loan is preferred.

Banks make it easier to apply for it through their websites and the Banking app. It gives you access to funds instantly with minimal paperwork, quick verification, and competitive Personal Loan interest rates. However, as lenders do not ask for collateral, they have stringent parameters to judge your eligibility. This impacts your application approval. Let us understand them in detail:

Existing liabilities

The Loan providers make it easier for you to manage the Loan with flexible repayment terms. They spread out the repayment in equated monthly instalments throughout the tenure. But this is only useful if you have sufficient funds to deploy for prepayment. In the presence of debts, it becomes challenging to manage an additional financial burden. Hence, if the amount of existing EMIs is higher, the Loan approval gets affected.

Income

Your revenue is the prime factor affecting your repayment capacity. If you have a higher income, you are better positioned to distribute it. We all have monthly financial obligations like rent, bills, maintenance fees, and other expenses. Having limited earnings makes it a struggle to fulfil them.

Adding a Loan to the list is not feasible. Hence, lenders consider this aspect while evaluating your eligibility. You get to check the same and plan your application with eligibility and an EMI calculator.

Job stability

Since there is no collateral involved, banks rely on your repayment capacity to repay the Loan amount. Hence, they check your financial stability. Having a higher income does not mean anything if it is not secured. For this reason, they weigh your employment history and employer's reputation for assessing longevity. In the case of Personal Loan for self-employed, they factor in the years of business existence and profitability.  

Credit score

It is the most important factor affecting your eligibility for Personal Loan. It depicts your repayment behaviour to them. This is crucial as that reflects the possibility of smooth repayment. A score is essentially a three-digit number ranging from 500 to 900. Ideally, having a ranking above 700 is considered favourable. If you have a higher score, the chances of approval increase and vice versa. Hence, check it beforehand to improve your profile.

Age

Your age is an indicator of your financial stability. When you are younger, you have more working years left. This makes it easier to handle financial responsibilities. But this is not possible as you grow older. Hence, lenders prefer younger applicants.

Types Of Personal Loan Interest Rates

Every bank has a different method of functioning. There are different types of offers and benefits that they offer. They want to keep their customers happy. Hence, they choose to provide user-friendly services.

Interest rate is the rate at which interest is applicable on any amount borrowed from a bank or Non-Banking Financial Company (NBFC). Personal loan interest rates are the critical factors that determine the selection of a loan application. Thus, always compare interest rates from multiple lenders before settling on a loan offer.

There are two types of Interest rates applicable on a personal loan, these are:

• Fixed-Rate of Interest
• Floating Rate of Interest

1. a) Fixed interest rate: In this case, the rate of interest remains constant throughout the loan tenure. Consequently, the monthly EMI amount also remains fixed throughout the loan repayment period. It may help to plan long term monthly expenses.
   
2. b) Floating interest rate: It depends on either the limitation set by the lender or as current market conditions. As a result, the floating interest rate is liable to change periodically, which leads to an increase/decrease in loan tenure or monthly EMI pay-outs depending on whether the rates move upwards or downwards.

Interest Calculation Methods
A personal loan calculator, available on online banking apps, can be used to calculate interest in the following methods:

• Flat Rate method: The interest gets calculated on the total loan amount initially borrowed over the entire tenure of the loan.
  
• Reducing Balance method: As monthly EMIs are paid off, parts of the loan amount and the interest component are also reduced. Thus, the principal loan amount decreases. The interest is calculated on this decreasing loan amount and not the total amount initially borrowed.

Interest Rates for Different Applicants
Most lenders consider some factors when deciding the interest rate applicable to loan borrowers. The following are some points on personal loan interest rates differ depending upon the applicant type:

• Salaried and self-employed: Generally, salaried employees with a stable employment record employed with reputed organizations get the loan at a lower interest rate than independent professionals because they have greater job security and better repayment capacity towards the loan. Self-employed applicants who have stable sources of income can also take these loans from banks.

• Women: Certain banks and NBFCs provide a preferential rate of interest to women. It is to promote salaried women, entrepreneurs, and professionals to fulfil their dreams and be financially stable.

• Pensioners: Pensioners can get special personal loans at a relatively lower rate of interest from banks. Beyond the applicant type, the interest rate depends on the profile of the loan applicant. People with a stable income, decent credit history tend to receive a loan at a lower rate, irrespective of their category.