What is a Personal Loan?
A personal loan is an unsecured loan which people take for their personal needs. Generally, all banks and NBFCs offer personal loans. These loans attract a very high rate of interest and it does not need any security/ mortgage to the financial institution from which you are taking the loan. On the other way, as the loan does not have any security, it attracts a high rate of interest rate. The personal loan eligibility and rate of interest depend on different criteria such as monthly income, credit score, repayment capability etc.
Eligibility Criteria of a Personal Loan:
There are no stiff guidelines for personal loan eligibility. However, every bank and financial organizations have their own set of rules or screening mechanism to disburse the loan. The common guidelines which are sought by almost every loan provider are as per the followings
- Individuals between 21 and 60 years age.
- The person should be a salaried employee. Some financial institutions give loans to self-employed professionals such as CAs, Doctors, Lawyers etc.
- The salary from the employer should be min Rs 15000.
- The individual is in the job for a minimum of last one year.
- Maximum loan amount you can get via personal loan is Rs 50 lakhs
- Even a low credit score of below 750 may not be a constraint for personal loan if you are agreeing to sail out more with a higher rate of interest.
Document Required Applying for a Personal Loan:
Generally, the following document is required to process a personal loan
- Identity proof such as Voter ID card, PAN card, AADHAAR card etc.
- Address proof such as Voter ID card, Electricity Bill, AADHAAR card etc.
- Last month salary slip
- Last 3-6 months bank statement
- Passport photograph
- Proof of business for self-employed professionals
Personal Loans do not have the income tax benefit. The EMI amount cannot be deducted from the income. You cannot claim the income tax benefit on paying the EMI of principal and interest of the personal loan.
Personal Loan Vs Loan against Credit Card:
Though both the loans attract high-interest rate personal loan is mildly cheaper than the credit card loan. You can approach any of the banks and apply for a personal loan and negotiate the interest rate based on your credit score and repayment capability.
You have to approach your credit card issuer bank to have a personal loan against your credit card. there is no need to submit the document and it is processed faster than personal loan.
Relation of Credit Score with Personal Loan:
Credit score and credit report play an important role in the processing of a personal loan. A credit score signifies the lender’s credit history and repayment capability. If you are having a good credit score (At least 750+) that means you are a good borrower who is diligent to repay the past debts.
It creates a belief to the lender that borrower will repay the money and that’s why the credit risk of the lender is less to the specific borrower. And the lender is ready to disburse the loan with a relatively low interest rate.
On the contrary, the borrower who has a low credit history and a bad credit report has to pay more interest for repaying the personal loan.
Hence, a good credit history is very important to everyone. If you don’t know your credit score yet get a free credit score right now.
Note: If you have a bad credit score and puzzled how to increase read these 5 easy ways for you.
Know the following 5 important factors that affect your Personal Loan approval
Personal loan eligibility is very much dependent on your income. Generally, the banks consider 50% of net salary as EMI towards the loan. If you have any existing loan that will also be considered for calculating the EMI of new loan. The combined total EMI should not exceed 50% of the net monthly income.
Here the variable salary is not considered for calculating the EMI. Suppose your monthly salary is Rs 1 lakh you can bear Rs 50000 as EMI towards all the loans. Hence the maximum EMI shall be set as Rs 50000 combining all the loans.
If you have already a home loan for which you are paying EMI of Rs 40000 monthly you will get a personal loan for which EMI is to be set maximum of Rs 10000 and accordingly the loan amount will be decided based on the repayment tenure.
#2. Employer’s Reputation:
Your employer’s reputation is also important for personal loan eligibility as well as interest rate fixation. The eligibility is more and interest rate will be less if you are employed in a reputed company.
An employee of a reputed company is known as more responsible and stable in their job so they are less likely to miss the EMIs and repay the loan timely without any risk to the bank.
#3. Relationship with existing Bank:
The existing relationship with a bank is an added advantage to take the personal loan. The bank knows its existing customer and his financial behavior which gives them confidence to approve a loan.
Suppose you have a salary account for last 10 years and the bank knows your credit and debit for last 10 years they easily get to know the financial behavior and expense style.
Though your credit history is tracked in the credit score and credit report, the existing relationship with a bank may give you a concession on interest rate or better loan eligibility.
#4. Number of loans at a time:
The loan eligibility also depends on the number of unsecured loans such as credit card loans or persona loans are ongoing at a time. If a long is going on you are applying for the second unsecured loan the interest rate will be high. My advice to you is that first you close the first loan and then apply for the second loan. Else you apply the second loan in the same bank and close the first one which will be easy to track and handle for you.
#5. More Enquiry for Credit:
Every time you apply for loans or any type of credit the same is captured in the credit rating agencies database. The higher the numbers of recent enquiries the more desperate you are for securing a credit. This behaviour makes doubtful about your intention to the banks and other financial institutions. The same rule applies for otner unsecured loans such as credit card also. This behaviour is reflected in your credit score and credit report. If you have already made your credit score poor start repairing the damage and improve your credit score.
In my view, personal loan is the crudest form of credit. You should not take a personal loan to meet the expenses for leisure or any other short term gratification. In case of emergency you can thought of personal loan. But my suggestion would be to maintain a healthy contingency/ emergency fund to take care the emergency requirement.
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