Personal loans are one of the most preferred loans. Why not? As they are easy to avail and can be made use of for a variety of needs.
What makes personal loans so popular? What should you know about personal loans before applying for one? You will get your answers to questions like these and more through this article. Read on to learn more!
What is a Personal Loan?
A personal loan is a short term unsecured loan that can be availed without the need for collateral. The eligibility and the lending criteria are relaxed in comparison to other loans like home loans or auto loans. The easy availability of online personal loans has further made it easier for even those with low credit scores and lower incomes to easily avail a loan on the loan apps or websites of these lenders.
However, as there is no collateral associated with the loan, a lender cannot put up the asset mortgaged for auction in case of a default on the loan. So, the interest rate on a personal loan is higher than those of secured loans.
Where Can You Get a Personal Loan from?
You can avail a personal loan from the bank where you have your account, from any Non-Banking Finance Company, a Cooperative bank, or Online personal loan lenders.
Eligibility Criteria for a Personal Loan
The eligibility criteria for a personal loan may vary between the lenders according to their lending policies. Generally, banks require a higher credit score and have stringent conditions for lending personal loans. On the other hand, online lenders allow even people with lower credit scores and lower minimum income to apply for a personal loan.
The nature of employment (salaried or self-employment) is also an important criterion that decides the eligibility for a personal loan.
Some of the other factors that lenders look into are your other fixed commitments, age, employment history, etc.
What Can You Use a Personal Loan for?
The greatest advantage of a personal loan is that it can be used for any purpose that you wish for. Moreover, there is no requirement for the submission of any proof of spending. This makes it easy to use a personal loan for multiple purposes as per your current financial situation. This makes availing of personal loans very efficient and convenient.
Some of the popular purposes for which a personal loan is availed are
- Meeting medical expenses
- Home renovation
- Meeting education expenses
- As a starter fund for new business
- For making a down-payment on another loan
- As a debt consolidation loan
- Meeting travel expenses
- As a two-wheeler/ four-wheeler loan
- Meeting expenses on social events like marriages or other functions
- Improving your credit score
Minimum and Maximum Loan Amounts for a Personal Loan
The minimum and maximum amount lent on a personal loan vary between lenders. While some banks can lend up to Rs 25 – 40 lakhs, online lenders restrict it to smaller amounts of up to Rs 3 -5lakhs. The loan amount is also decided based on the lender profile like take-home income, credit score, other fixed commitments, age, employment, etc.
The minimum amount that you can avail as a loan also depends on the lending policies of the lender. The minimum amount to be borrowed can lie in a range of Rs 3000 – Rs 10000 for online lenders and banks may look at a higher minimum loan amount.
Documents Required for a Personal Loan
Unlike many other secured loans like home loans which require a ton of documentation, a personal loan requires minimal documents. The documents you require for a personal loan are
- Proof of Identity
- Proof of address
- Proof of Income
Many of the Government approved documents like Voter’s ID, Aadhaar Card, Driving License, Passport, etc can work well for identity and address proof. Your salary slip, bank statements, or Income Tax Return can serve as proof of income.
Application Process and the Time Taken for Disbursement
Time is of the essence in many situations for which you may require a personal loan. It may be a medical emergency, a month-end cash crunch, or a business requirement.
Traditional lenders like banks take a longer time for processing and disbursing the loan. Many of them allow online applications only for their customers. But, online personal loan lenders like Money View follow a completely digital process for giving out personal loans. The entire process right from eligibility check to submission of the application and documentation happens on your mobile/ computer through their app/website. Moreover, loan disbursals can happen in 2hrs, if the customer submits all required documents on time.
So, it is very important to consider the ease of application and the time taken for disbursal while applying for a personal loan.
Credit Score Requirement for a Personal Loan
You must be aware that you cannot avail of any loan from organized lenders like banks, NBFCs without a good credit score. Your credit score is nothing but a 3 digit figure in the range of 300-900 which is calculated based on your past and present behavior towards handling credit (loans or credit cards).
Banks and NBFCs look for a minimum score of 750 to lend personal loans as they are unsecured loans. But, online personal loan lenders allow loans on lesser credit scores. For Ex: Money View allows personal loans on a minimum credit score of 675 as they use their in-house credit assessment model to determine the creditworthiness of their borrowers.
Interest Rates on Personal Loans
As we spoke earlier, personal loans are unsecured loans (without collateral). So, the interest rate charged on a personal loan is anytime higher than other secured loans. In this case, banks/NBFCs have an upper hand as their interest rates on a personal loan are the least in the market. Currently, the rates start from 12% onwards.
Online personal loan lenders charge higher interest rates on a personal loan than a bank/NBFC.
But the important point to remember here is that, though the banks or online lenders quote an interest rate, the final offer you get depends on your credit score, other existing loans, employment, age, income, etc.
You should also factor in the processing charges charged on the loan. It could be anywhere between 1-5% of the loan depending on various factors.
Joint Application for Personal Loans
Banks and NBFCs allow joint applications for personal loans. You could apply with your spouse or other family members like parents. When you apply jointly, your eligibility criteria increase as the income and credit scores of both the applicants are taken into account. But this facility may not be available with all lenders.
Prepayment of Personal Loans
Personal loans are based on fixed interest rates. So, they are not allowed to be closed at any time as you wish. All personal loan lenders mandate you to pay loan EMIs for a certain fixed tenure before they allow prepayment of the outstanding loan. Part prepayment is generally not allowed. Also, an additional charge called the prepayment penalty may be levied when you do prepayment.
These are some of the important factors you should consider before applying for a personal loan. Once you avail of a personal loan, ensure you pay off your EMIs promptly each month.