A Guide to Personal Loans

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Introduction to Personal loans 

When a sudden financial shortfall arises, the first thing that would come to your mind is taking the assistance of debt to curb the crisis. Apart from unplanned expenses, a personal loan comes handy for planned events and purchases too. With the increase in the number of aspiring Millennials, there is an increased demand for personal loan products.

Millennials today believe in meeting their aspirational needs at every stage of life and fulfill their desires at all odds. A personal loan can help overcome the financial hurdle without the strain on monthly budgets.  

Having said that, why are personal loan products a favored/popular option amongst Millennials?

Personal loan is easily available and accessible these days, especially with the advent of technology. New age lenders have made it possible to access these debt instruments from the comfort of your homes.

Moreover, personal loans do not demand to pledge any asset in order to avail them. This makes these debt products more reliable and efficient. 

Personal loans today are being offered by a plethora of lenders. Some of them have customized loans in a manner that they are fit to pocket, minimum documentation, and quick processing time. 

Regardless of the easy availability, there are a lot of questions that arise while considering a personal loan for any financial need. Here is a Guide to Personal loans, so that you can be certain of availing one in times of need. 

personal loan

Who is eligible for a Personal loan?

The personal loan eligibility criteria certainly differ from lender to lender. Owing to the nature of personal loans being unsecured in nature, lenders usually offer personal loans to individuals with a fixed monthly income.

The usual minimum income criteria are INR 20,000 to INR 35,000. The other important parameter considered under the eligibility criteria for personal loans is Age.

Each lender sets a specific bar under the age criteria. However, individuals who are 21 years and above are usually considered eligible for a personal loan. 

What are the documents that are required to avail a Personal loan? 

Again, this is one such segment in which each lender sets their own requirements based on the company policy. As a personal loan does not demand collateral against the borrowed sum, the lenders demand sufficient documents before being decisive of personal loan approval. The most commonly demanded documents are as under – 

  1. PAN-Card
  2. Aadhar card
  3. 3-6 months Bank statement
  4. 3-6 months Salary slips
  5. If you have changed your job within the past 3 to 6 months’ span, the lender may ask you to provide the salary slips of the previous employment as well as the current one.
  6. Address Proof

You must ensure that you provide genuine documents in order to avoid any interruption in the verification process. 

What are the Factors considered by lenders while reviewing a Personal loan application? 

While reviewing a personal loan application, lenders often consider a few factors before approving or rejecting a personal loan application. These factors collectively form the basis of the decision taken by the lender. 

Credit score

A credit score is the primary factor in determining the creditworthiness of an applicant. It is a three-digit statistical figure usually ranging from 300 to 900. A credit score of 750 and above is considered to be a good score. However, many lenders consider scores of 650 and above while approving a personal loan application. 

Credit history

Credit history is responsible to show a lender how much risk is involved in extending a personal loan to a said borrower. A credit report highlights your past performance with regard to availed credit and also the payment history.

How you have managed your past debt obligations speak for the chances of future loan approvals. If you have made timely payments towards your past EMIs, it will reflect in your credit report and translate into a healthy credit score. 

Fixed Obligation to Income ratio (FOIR)

Fixed Obligation to Income Ratio (FOIR) is a tool used by lenders to calculate the applicant’s eligibility for more debts. Lenders compare your expenses and debt obligations against your monthly income to determine whether you would be able to take over more debt and repay it.

The expenses taken into consideration are on-going debts and debts arising out of credit cards, other debt instruments, and any other fixed monthly obligation. 

The FOIR Requirement differs from lender to lender, however, a Fixed Obligation to Income Ratio of 40 to 50% is more desirable in terms of personal loan approval. 

Debt to Income Ratio (DTI)

A Debt to Income Ratio also known as DTI is much like the Fixed Obligation to Income Ratio. The only difference here is that the Debt to Income Ratio takes into account the ongoing debts and not the other obligations like Rent.

This ratio helps lenders determine the applicants’ creditworthiness based on how prudently you can manage your monthly income. A higher DTI would denote that most of your income is consumed in paying off debts.

A debt to income ratio between 30 to 50 percent is considered to be a good indicator of well-managed finances. 

Credit utilization or Credit exposure 

Credit Utilization or Credit exposure, in layman’s terms, is the amount of credit you have used against the amount of credit extended to you. Take, for instance, your lender extended a credit line of INR 3,00,000 from which you utilize INR 1,50,000 from the credit limit, then your credit utilization ratio is 50%.

A Credit utilization Ratio of 30 percent or less improves your chances of loan approvals as it indicates that you are not highly dependent on credit. 

What are the different types of Personal loans available in the market? 

While personal loans have no restrictions on usage, they can be available for multiple purposes. New Age lenders have customized personal loans with a very need a specific approach. 

Listed below are the types of customized personal loan offerings available in the market.  

Loan for Medical emergencies

While most of us must be covered under a Health Insurance plan, many Health Insurance plans do not cover all the illnesses and hospitals or might even lack complete coverage.

A personal loan for medical emergencies or a medical loan helps to meet the financial requirements incurred during a medical emergency.  

Personal for Travel expenses

A Travel loan helps cover all the expenses you would incur while planning a trip with friends or family. Even if you have sudden travel for work, a travel loan comes most handy. Lenders offer various customized repayment plans in order to ease the load of EMIs. 

Personal loans for Wedding

A Wedding loan is designed keeping in mind the expenses that one incurs during a wedding. Any Indian wedding would cost somewhere between Rs. 5 lakhs to 10 lakhs.

A Personal loan for a wedding helps you meet expenses like catering, photography, clothing, venue, etc; without denting your savings. These loans also come with customized repayment plans so that you can start off your new life without the woes of heavy EMI obligations. 

Personal Loan for School Fees

Many millennial parents take the assistance of personal loans to pay off their children’s school or academic fees. We are well aware that schools demand fees to be paid on a quarterly or a half-yearly basis. This often ends up debiting a big chunk from your monthly income.

A Loan for school fees helps to break down this expense into smaller monthly payouts. It helps relieve the load and keeps aside the amount for other monthly expenses. 

Personal loan for Home improvement 

We often delay our home renovation or home improvement plans due to the heavy expenses it demands. However, with a personal loan for Home Improvement, you can meet your home renovation needs without the worry of finances. This way you can refurbish your dream home in an affordable repayment plan. 

Tips to Improve your chances of a Personal loan Approval 

On applying for a personal loan, lenders scrutinize your application and profile before being decisive in extending you a loan. However, to improve your chances of a personal loan approval there are few habits you can adopt pre hand. Here are some of them listed below – 

Choose Loan Amount wisely

While applying for any loan you must choose the Loan Amount wisely. You certainly do not want to take up an obligation more than you need. Always borrow the exact amount required to meet your needs.

Choose a suitable Loan Tenure

You must be certain of the tenure for which you require the amount. As you are aware that you are charged interest on the borrowed sum, you do not want to keep paying the obligations for a longer period than required. 

Check Affordability of Loan

You must ensure that you have compared the features and EMI affordability of the personal loans available in the market. There are multiple lenders who offer attractive repayment options that demand a comparatively lower installment. Opt for the one most affordable for you. 

Pay your EMIs on time

In order to improve creditworthiness, it is important that you service your debts on a timely basis. This adds a lot of value to your credit profile and certainly boosts your credit score. 

Opt for Loan Insurance

Protecting your debt repayments must be of utmost priority at all times. To ensure the same, Loan Insurance comes most handy! Loan Insurance is designed to cover your monthly loan installments in case of temporary/permanent crisis viz., disability, job loss, or any shortcomings occurring out of an unforeseen circumstance. 

Adopting a few good credit habits can certainly work in your favor. It is wise to meet your financial needs with the help of a personal loan, however, it is important that you service your loans prudently!

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