Things You Want to Know Before Taking a Personal Loan

For most people in need of quick money for the family holiday trip, wedding or festival purchase a personal loan tops the list of options. Personal loans can be availed for any kind of personal expenses of an individual or household. Because these loans score better in terms of convenience most people don't look beyond them for the house renovation, family ceremony, vacation or just a big gift for a love one.  Below we will look at how to avail them and how to substitute them with smarter financing options.

Why personal loans are popular

Personal loans are unsecured loans. This means you don't need to produce an asset you own as security to the lender. The bank lends to you merely based on net take-home income. As long as the lender is satisfied that you have a stable financial position it won't demand a guarantor either. This makes personal loans very risky for the lender and they are charged very high interest rate compared to secured loans like home loan and vehicle loan.

Once application is submitted and documents such as identity proof and income proof are provided it takes just 3-7 days for the loan to get sanctioned. Since there are no verification of assets involved approval and disbursal is fairly hassle-free. Once approved the amount is given as a DD or cheque.

Personal loans can be availed for as little as Rs 20,000 to as much as Rs 20 lakhs. Usually these loans are short term loans and can be repaid in 1 year to 5 years.

What do banks look for while checking eligibility

i) Income

The top criterion for getting personal loan approved is your income. The more you earn more comfortable the bank will be in giving you the loan. It is not just how much you earn that matters but who you work with, how long you've worked with them and your position in the company. Banks usually grade corporates for credibility and if you happen to be working in one of the top companies in their list you are more likely to get a better deal. So somebody working in an entry level position in a big corporate may get loan for lower interest than an executive in a lesser known company. 

Similarly a better deal may be possible if you approach the bank where you have a salary account provided you've been working with them for a substantial period and the bank grades the company well. If you are self employed the bank will take into account balance sheets of the previous two years with other business related income supporting documents.

ii) Stability

Banks also look for stability. So if you own a house in the place where you're applying for a loan you will earn more trust than someone who owns no property. If you are married the bank will consider you to be more stable than a bachelor. If you have a clean past record with EMIs and credit cards (if any) you stand a higher chance. Banks also grade cities for deciding the lending criteria.

iii) Relationship with them

Finally though it is not necessary to have an account with the bank you're borrowing from, your banker knows you well and your financial status. Borrowing from your banker may give you an edge in terms of approval speed and maybe even a waiver of processing fees. You can negotiate with them for lower rate too due to the trust factor.

Interest and repayment of personal loan

Personal loans are the most expensive loans to have after credit card debt. Interest rate ranges between 16-24% depending on banks and their qualifying criteria for the borrower. If you must go in for a personal loan check rates offered by different banks and try availing it from the bank that is willing to give you the lowest rate.

Pay attention to the repayment schedule as well. Usually paying higher EMIs for a short duration is cheaper than paying lower EMIs for a long duration but don't strain your finances too much to pay off debts. Whenever you can, pay more than the EMIs. Most lenders don't encourage prepayment before six months of availing the loan but if you intend to make prepayment choose a shorter duration loan.

Final Note

Personal loan is an expensive way of meeting your personal need, whatever it may be. They are a relief, no doubt, when you are in urgent need of cash to sponsor a need but in the following months they will make you indebted. They should be avoided if your expense can be deferred or the purchase can be postponed. Borrow only till the limit you can afford to pay without straining your household finance. 

If the need can at least be partially met by borrowing from a family member or friend for lesser interest (or no interest!) go ahead. If one bank is unwilling to sponsor the entire amount do not seek another lenderto sponsor the remaining amount. Read the fine print about all fees and charges involved and don't sign on blank spaces in the form. If you have a personal loan, pay more than the monthly minimum as and when your finances allow.

Try cheaper alternatives to personal loan. If you possess gold, property or other financial assets like shares, bonds, mutual funds or LIC policies you can pledge these to get much cheaper secured loans. When you have paid back the loan the secured assets will be released.

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