Personal Loans – Rates, Eligibility, Features and Factors Affecting Eligibility in 2024
A personal loan is a loan given by an individual to meet their financial commitments or requirements. This type of loan comes in handy if you have unexpected expenses to deal with.
Individuals use funds obtained through personal loans to make large purchases, consolidate high-interest debt, pay for weddings and education, travel , and many other reasons.
Loans are usually obtained from banks or non-banking financial companies (NBFCs) at pre-agreed interest rates and terms and conditions.
Features and Benefits of Personal Loans
Personal loans are unsecured loans that do not require the applicant to provide any assets as collateral.
Offered based on the credit profile of the borrower’s credit report/history analysis .
In the case of a home loan or car loan, you can only use the funds to buy a house or car. Personal loan funds can be used for any purpose.
The loan term varies from 12 months to 60 months according to your convenience.
Minimal documents such as proof of identity, address and income are sufficient to apply for a personal loan.
There are many instant loan disbursement programs where the lender hands you the cash within a few hours.
The loan amount depends on many factors such as repayment ability, source of income, etc.
It can range from 10,000 rupees to several hundred thousand rupees .
Factors Affecting Personal Loan Eligibility
Credit score
A credit score is a 3-digit number that represents your creditworthiness with a lender. It describes how you have managed your finances and bills in the past. The lower the score, the less chance you have of getting a good deal on your loan application.
Many lenders are even denying financing to individuals with low scores because they believe the borrower may default on loan repayments. To improve your chances of getting a loan, it is recommended that you check your credit score beforehand, and if it is low, you can work on building it before applying for a loan.
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Monthly income
Since collateral cannot back up a personal loan, your monthly income and ability to repay becomes important. Income requirements vary depending on the region you live in, i.e. income requirements may vary between major cities, tier 1 cities, tier 2 cities, towns and villages.
Work experience
Applicants who have recently been employed or started a business are considered by lenders to be financially insecure. Applicants with sufficient work experience are more likely to be approved because lenders believe they have relatively secure financial plans and savings.
At least 2-3 years of experience is preferred ; applicants should have worked at their current employer for at least 1 year.
Debt
When it comes time to approve your loan application, your current liabilities can make or break a deal.
If you have paid huge credit card bills, home loan EMI, car loan EMI and other debts and you have applied for a personal loan, the lender will weigh your debt to income ratio and may decide not to approve the application.
That’s because most of your monthly income may go towards loan repayments, which may not leave you with enough money to cover household expenses.
Age
The age of the applicant plays an important role in loan approval. Lenders check their age to ensure that borrowers have enough working hours to pay back their loans.
Thus, salaried applicants must be in the 23-58 age range when applying for a loan, while self-employed laypersons must be in the 28-65 age range to be easily accepted.
When to Apply for a Personal Loan?
Pay off high interest rate debt
In the event of being unable to pay credit card bills or high interest rate loans, individuals seek the help of personal loans to pay off high interest rate debts immediately and pay off personal loans through monthly installments.
Medical emergency
When a medical emergency occurs and there is not enough funds to cover medical expenses, individuals seek personal loans. Since some lenders offer immediate personal loans, it comes in handy when dealing with Emergencies.
Education expenses
When you or a loved one want to pursue higher realms through higher education, you may prefer a personal loan to cover the associated costs.
Down payment for buying a car/house
A home loan or car loan usually includes a security deposit of at least 10%-15%. This means you will have to pay at least 10%-15% of the cost of the property out of pocket. If you do not have enough savings to cover this expense, you can apply for a personal loan to cover this expense.
Financing Your Business
Some people use personal loans to finance their business. Suppose there is a sudden need for cash to replenish inventory or deliver bulk orders to customers on time. Applying for a business loan in this situation can take several days to evaluate your documents. In this case, a personal loan can be useful.
Wedding expenses
Organizing a wedding is an expensive affair, especially in India. When needs exceed your budget, you can apply for a personal loan to manage expenses and repay the loan amount later.
Holiday
If you are planning an international vacation but are unable to achieve your goals due to a lack of funds, you can take out a personal loan to cover the shortfall and pursue your dream vacation. Once you get back, the loan can always be repaid.
EMI Calculator
Personal Loan EMI Calculator is a smart tool that calculates the amount of EMI you owe to your lender every month. It is basically a tool where you can enter values like principal loan amount (P), loan repayment period (N) and interest rate (R) to find out your EMI and calculate your budget in advance.
What you should know
Interest rates: Since personal loans are unsecured, interest rates can be higher. It will help if you choose fixed or variable rate depending on your bank or NBFC.
Penalties: Banks and non-bank financial institutions will charge you heavy penalties on your loan if you do not pay your dues/EMI on time.
Analyze Necessity: A personal loan or any loan is for a genuine and urgent need. Therefore, if your financial situation can be resolved without taking out a loan, then you should avoid taking out a loan.
How to apply?
Step 1: Check if you qualify for a personal loan.
Step 2: Do your research on personal loan offers and screen out some lenders that you think will be beneficial to you .
Step 3: Visit the nearest branch or its website.
Step 4: After asking for a quotation in detail, fill out the application form and attach the necessary documents.
Step 5: The bank will process your application and inform you of their decision within the stipulated period.
Thanks to digitization , applying for a loan is no longer limited to multiple trips to the bank. Instead, you can do it online. Once you understand the entire loan process and agree to the terms and conditions of the personal loan, the bank will collect the required documents.
It initiates the loan process including checking your CIBIL score, financial urgency and more. Based on the evaluation of all documents, the bank will inform you of its decision on your loan application.
