A personal loan is a loan taken out from a bank or non-bank financial corporation (NBFC) to meet personal expenses. It is unsecured as it is not necessary to pledge collateral and therefore carries a higher rate of interest compared to secured “home and car” loans. A personal loan is sanctioned based on a combination of factors such as the borrower’s income, employment, credit history, and repayment capacity.
A personal loan can be used at the borrower’s discretion. Some may opt for a personal loan to finance their travel and wedding expenses, while others may use the money for medical contingencies, businesses, and home renovations.
A personal loan has a term ranging from one to five years; shorter and longer terms may be authorized on a case-by-case basis. Personal loans are generally disbursed within seven business days of applying for the loan.
The interest rate for a personal loan is either fixed or variable. Fixed rate personal loans have fixed monthly payments (EMI), while variable rate personal loans have a variable rate mechanism that changes annually or semi-annually according to the new rules of the marginal cost of funds lending rate (MCLR). ).
How to increase the chances of obtaining a personal loan?
Personal loans are easier to obtain than home and auto loans, but that doesn’t mean that getting a personal loan is a given. It is important to tie several ends before you see the money in your savings account.
Maintain a good credit rating
The importance of a good credit score in securing a loan sanctioned cannot be overstated enough, as the credit score measures a borrower’s ability to repay a loan in terms of credit history. An aspiring borrower should be aware of payments, make timely repayment of existing loans and installments, as well as credit card dues, as one late payment can be a stain on credit history. The higher the credit score, the better the chances of getting the loan approved. Getting a loan can be a snap for loan seekers with a Cibil credit score above 760, while those on the lower side can clear past debts before applying for a loan again.
Limit outstanding debt
Debt-to-Income Ratio (DTI), which is your monthly debt divided by gross monthly income, is a measure of how much you can afford to borrow. The general rule is that you should not spend more than 40 percent of monthly income to repay loans. Lenders want to ensure a borrower’s ability to repay them and thus take into account the DTI ratio before deciding on a loan application.
Avoid multiple loan requests
Do not succumb to the temptation to approach multiple lenders in the hope of receiving that elusive loan as this would give a hint of desperation to a loan. The exercise of using multiple loans also paints a not-so-rosy picture of one’s financial situation, which is an early red signal of a lurking debt trap. As a borrower, you don’t want to be in such a situation. Each loan refusal results in a lower credit rating, which makes it much more difficult to obtain credit in the future.
Have a stable job
Personal income is a crucial determinant in the success of a loan approval. Lenders want to make sure that you are earning enough money to pay off the loan and that the income stream will remain constant in the future. Frequent job changes can make lenders wary of a person’s personal and financial stability. Additionally, a sharp drop in income or a change in job prior to applying for a loan can cast a negative light on a person as a responsible borrower.
Don’t rush into loan applications
It is a good idea to keep a gap of at least 6 months between loan applications. If a loan application is rejected for some reason and obtaining a personal loan is not a matter of life and death, it makes sense to take a step back before applying for a loan again. This will demonstrate that your financial health and fiscal discipline are good enough to be maintained without a loan, thereby improving your chances of getting a second loan approval.
The bottom line is that there is no safe way to ensure that you are making this personal loan after all. But by being careful and proactive, you can increase the chances of hearing a “Yes” from the lender of your choice.