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Business News/ Money / Personal Finance/  Personal loans: Everything you need to know before applying for one
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Personal loans: Everything you need to know before applying for one

Before applying for a personal loan, familiarize yourself with how personal loans work. This will enable you to make an informed decision about the suitability of this type of borrowing for your needs before applying for an instant personal loan online.

Learn how personal loans work before applying for one.Premium
Learn how personal loans work before applying for one.

Personal loans adhere to a defined process, and comprehending it can assist you in determining whether they are the appropriate financial solution for your requirements. Here is a breakdown of how they work:

Submission and authorisation

You initiate the personal loan application process through a bank, credit union, or online lender. This generally entails completing an application form with information such as your income, employment details, and the desired loan amount.

The lender will examine your application and evaluate your creditworthiness, taking into account factors such as your credit score, debt-to-income ratio, and employment history. Additional documents, like pay stubs or bank statements, may also be requested.

Upon their assessment, the lender will either approve or deny your loan application. They may also propose an alternative loan amount or interest rate compared to your initial request.

Distribution of the loan funds

Upon approval, you will be provided with a loan agreement detailing the terms of the loan, encompassing the interest rate, loan amount, repayment term, and any applicable fees. Upon signing the agreement, the lender will release the loan amount, typically deposited into your bank account as a lump sum.

Although lenders may advertise instant personal loans, it's crucial to recognize that this doesn't necessarily translate to receiving cash immediately.

Loan repayment

You will commence making regular monthly payments towards the loan, usually comprising:

  • Principal: The initial sum you borrowed.
  • Interest: The expense associated with borrowing the money, computed as a percentage of the principal.

You will persist in making these payments until the loan is entirely settled, following the agreed-upon repayment term. Nevertheless, you should also take into account the following considerations before pursuing a personal loan for individual purposes.

  • Origination fees: Certain lenders impose an origination fee to offset the expenses associated with processing your loan application.
  • Prepayment: Certain loans may permit early repayment without incurring penalties, providing the opportunity to settle the loan ahead of schedule and potentially reduce interest costs. Nevertheless, this provision may not apply universally, so it's crucial to thoroughly review the terms.
  • Missed payments: Failure to make loan payments on time can have adverse effects on your credit score and result in late fees and penalties.

Frequently Asked Questions (FAQs)

Q. Which factors can affect your eligibility for a personal loan?

Various factors can impact your eligibility for a personal loan, and lenders assess them with varying importance:

  • Credit score: This holds substantial importance as it mirrors your creditworthiness and repayment track record.
  • Income and employment: Lenders evaluate your capability to repay the loan by considering your income and employment consistency.
  • Debt-to-income ratio (DTI): This measures your total monthly debt payments relative to your gross income. A lower DTI enhances your likelihood of approval.
  • Loan amount and purpose: Your eligibility may be influenced by both the requested loan amount and its intended purpose.

Q. What is the maximum amount that you can borrow through a personal loan?

The eligible amount is determined by various factors specific to your financial circumstances, and lenders evaluate these factors to ascertain your borrowing capacity. The potential loan amount you can qualify for is contingent on several factors, such as

  • Lender's criteria: Each lending institution establishes its guidelines for determining maximum loan amounts.
  • Creditworthiness: A robust credit score might enable you to secure a larger loan amount.
  • Income and employment reliability: A higher income and consistent employment generally facilitate access to larger loan amounts.
  • Debt-to-Income ratio (DTI): Having a lower DTI ratio enhances your borrowing capacity.

Q. What is the usual timeframe for obtaining a personal loan?

Personal loans are frequently recognised for their relatively swift processing compared to other types of loans. Approval durations may differ among lenders, ranging from a few hours to several business days.

Q. What advantages come with opting for a personal loan?

There are myriad benefits to taking a personal loan, including:

  • Rapid and convenient access to funds: Personal loans typically offer a quicker and simpler application and approval process compared to other loan types.
  • Versatile utilisation of funds: Unlike certain loans restricted to specific uses, personal loans allow you to use the money for various purposes.
  • Steady monthly payments: Predictable monthly payments are guaranteed by fixed interest rates and terms, facilitating budget planning.

Q. Are there any disadvantages associated with obtaining a personal loan?

It's crucial to keep in mind that personal loans carry potential downsides, such as

  • Elevated interest rates: Despite being potentially lower than credit card rates in certain instances, personal loans may still entail relatively high-interest rates when compared to alternative loan choices, such as home loans.
  • Debt load: Introducing an additional debt commitment can amplify your overall financial burden, emphasising the importance of thoughtful consideration and responsible borrowing.
  • Risk of excessive spending: The accessibility of a substantial sum of money may tempt individuals to overspend if not handled with responsibility.

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Published: 04 Mar 2024, 09:25 PM IST
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