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Business News/ Money / Considering taking a personal loan? 3 essential things to keep in mind before applying for one
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Considering taking a personal loan? 3 essential things to keep in mind before applying for one

Personal loan terms and conditions can differ among lenders, yet several essential factors are worth considering.

Being aware of terms and conditions is necessary before applying for a personal loan.Premium
Being aware of terms and conditions is necessary before applying for a personal loan.

Personal loans provide individuals with a valuable financial flexibility to fulfill a range of needs and aspirations. Yet, it’s crucial to understand the terms and conditions governing these agreements before pursuing a personal loan. 

Exploring eligibility factors

The initial stage involves meeting the loan qualification criteria. Lenders evaluate your repayment capacity using factors such as:

  • Credit score: Typically, a score exceeding 700 reflects a positive credit history and prudent borrowing practices.
  • Income and employment: Demonstrating stable employment and adequate income showcases your ability to meet monthly payments.
  • Debt-to-income ratio (DTI): This ratio compares your monthly debt commitments to your total income, with a lower DTI indicating manageable debt levels.
  • Additional factors: Residency status, loan purpose (some lenders impose restrictions), and previous loan repayment patterns may also impact eligibility.

Exploring loan options

After meeting the eligibility criteria, consider various loan terms.

  • Interest rates: Fixed rates remain constant for the entire loan duration, whereas variable rates may change over time.
  • Loan amount: This is determined by your requirements and the lender’s maximum limit.
  • Repayment term: The duration of the loan affects your monthly payment. Longer terms result in lower monthly payments but higher total interest costs. Consider options such as equated monthly installments (EMIs) for consistent and predictable payments.

Prepayment options

Understanding prepayment choices is a crucial aspect of grasping the terms and conditions of a personal loan.

  • Early repayment: Check the terms and conditions to see if early loan settlement is allowed.
  • Prepayment fees: Some lenders impose a penalty for early repayment, typically a percentage of the remaining balance.
  • Reasoning behind penalties: Although it may seem counterintuitive, lenders charge these penalties because they lose expected interest income.
  • Explore options: If prepayment fees are a concern, negotiate with the lender or consider loans from providers that don’t have such penalties.

The terms and conditions typically specify how the lender will communicate in case of default. They will likely reach out to discuss repayment options. It’s important not to disregard these communication attempts.

Frequently Asked Questions

Q. What are the characteristics of a personal loan?

Personal loans offer a range of attributes that make them attractive for diverse financial requirements. Here are some of the main features:

  • Unsecured: In contrast to loans like auto or home loans, a personal loan doesn’t necessitate collateral. Lenders assess your eligibility based on your creditworthiness.
  • Versatile application: Personal loans can be utilised for a wide range of purposes, including debt consolidation, home renovations, medical bills, or unforeseen expenses.
  • Speedy approval process: Personal loans frequently feature a swifter application and approval procedure compared to other types of loans. This can be advantageous when urgent funding is required.
  • Stable interest rates: Personal loans commonly offer fixed interest rates, ensuring that your monthly payments remain constant throughout the loan duration. This promotes predictable budgeting.
  • Flexible repayment durations: Typically, lenders provide a variety of repayment periods, enabling you to select a loan term that aligns with your financial plan. Longer terms result in lower monthly payments but may lead to paying more interest over time.
  • Possible origination charges: Certain lenders impose an origination fee, a percentage of the loan amount paid upfront by the borrower.

Q. State the eligibility criteria for getting a personal loan

The criteria for qualifying for a personal loan may differ based on the lender, yet here are some common factors they take into account:

  • Age requirements: Typically, lenders expect applicants to be between 21 and 25 years old for minimum age.
  • Maximum age limit: Depending on the lender, the maximum age can range from 58 to 65 years old.
  • Income threshold: The minimum income needed varies by location and lender, often starting at around 15,000 per month and higher in metropolitan areas.
  • Employment status: Lenders usually prefer applicants with a stable income, such as salaried employees with at least one to two years of work experience, although some may also consider self-employed individuals.
  • Creditworthiness: A good credit score, typically above 680 or 720, is crucial for personal loan approval and favorable interest rates.
  • Debt-to-income ratio (DTI): Lenders assess your DTI, comparing your monthly debt payments to your gross income. A lower DTI enhances your chances of approval and can lead to better interest rates.

Q. Share some tips for avoiding personal loan rejection

Here are some strategies to enhance the likelihood of approval for your loan application:

  • Strengthen your credit score.
  • Maintain a favorable debt-to-income ratio (DTI).
  • Manage your credit utilisation ratio.
  • Apply with a co-borrower who has a solid credit score.
  • Refrain from submitting multiple loan applications within a short timeframe.
  • Demonstrate a stable employment record.
  • Collect and double-check all necessary documents for accuracy.
  • Borrow only the amount you genuinely need.

Q. What documents do you need for a personal loan?

The documents required for a personal loan in India may vary slightly based on whether you’re a salaried individual or self-employed. However, they generally fall into three categories:

Know Your Customer (KYC) documents

These documents assist the lender in verifying your identity and address. Common KYC documents include:

  • Aadhaar card
  • Passport
  • Voter’s ID card
  • Driving license
  • Permanent Account Number (PAN Card)

Income verification

This aids the lender in evaluating your repayment capacity.

  • For salaried individuals: Typically, you’ll be required to provide the last 3 months’ salary slips and bank statements reflecting salary deposits.
  • For self-employed individuals: You may need to submit audited financial statements for the previous two years, the latest 6 months’ bank statements, and evidence of business continuity and existence.

Additional documents

Depending on the lender’s requirements, you might also need to furnish:

  • Passport-sized photos
  • Proof of address (such as a utility bill or rental agreement)
  • Proof of job stability (like an employment ID card)
  • Proof of residence or office ownership (for self-employed individuals)
  • Tax-related documents (optional)

Q. State the various categories of personal loans

Personal loans fall into two primary categories: Secured and unsecured. Secured loans necessitate collateral, an asset the lender can claim if you fail to repay. Unsecured loans, on the other hand, do not require collateral but often have higher interest rates.

Here’s an overview of the various types of personal loans:

  • Secured personal loans
  • Unsecured personal loans

 

 

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Published: 25 Apr 2024, 02:02 PM IST
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