What is a personal loan?
A personal loan is an unsecured loan taken by individuals from a bank or NBFC (Non-Banking Financial Company) to overcome their financial exigencies. A personal loan helps pay for some types of personal expenses such as various debts from different creditors (known as debt consolidation), wedding expenses, home improvement expenses, holiday expenses, or even medical expenses. Personal loans are extended based on several criteria, like credit score, employment status, per month salary or income, repayment capacity etc.
This article aims to cover all aspects of a personal loan: various reasons to get a personal loan, common mistakes to avoid while applying for personal loan, personal loan secrets, personal loan myths, personal loan interest rate, smart ways to use personal loans etc.
5 notable reasons why you should opt for a personal loan
There is no restriction on end use of a personal loan, hence you can use a personal loan for any purpose. Some of the common situations that a personal loan can be used in are as under.
Handling several debts of different amounts with various creditors is a difficult task. As date, interest rate and method of payment of several debts may vary from one another. Due to multiple debts, you may miss some payments and end up paying more interest over time. In such situations, a personal loan with more favourable pay off terms, i.e. lower interest rate and flexible repayment tenure, can combine multiple debts into a single and larger debt.
To pay off credit card bills
If you don’t pay your credit card bills on time, you can come under a crippling debt over time due to higher interest rates on a credit card. Rate of interest applicable on a personal loan (11% to 20% per annum) is much lower than that on a credit card (2.5% to 3% per month). Therefore, in order to avoid getting into a heavy debt, you should consider getting a personal loan to pay off your credit card bills. Paying your credit card debts with a personal loan is arguably the best reason to take a personal loan.
It helps with unplanned expenses
Irrespective of one’s financial status, unplanned expenses and financial crisis can hit anyone. Rather than dipping into your savings, taking a personal loan to cover these expenses makes more sense. Moreover, when you get a personal loan to cover these expenses, you help build your credit score and protect your financial nest egg.
Usually, we don’t allocate budget for home renovation, whereas home may require repair at any point of time. You may wish or need to upgrade your kitchen, remove dampness of walls of your apartment, renovate bathroom etc. A personal loan can come handy in such situations.
A personal loan can also be used to make major purchases like home appliance, latest gadgets and more for which you have no or a little budget or saving.
To cover holiday expenses
We all need a break from our stressful job or lifestyle, but our income and savings may not allow us to go for a dream vacation. A holiday loan under the umbrella of a personal loan can be the best solution to fund your solo or family trip, and you can pay it off over time as per your convenience.
Eligibility for a personal loan
While eligibility criteria may vary from lender to lender, here are some common requirements you need to fulfil to apply for a personal loan.
Age Limit: Anyone within the age limit of 21-58 years can apply for a personal loan.
Monthly Income: Anyone whose minimum salary is 15k per month is eligible to apply for a personal loan. However, it depends on key factors like age, location, company etc.
Income status: Any salaried person or self-employed individual who has been getting a regular income for minimum past 2 years can is eligible to apply for a personal loan. The applicant must be drawing regular income from the current employer or current business for the last 1 year.
Good credit score: Applicant needs to have a good credit score to apply for a personal loan. A good credit score ranges from 750 to 900. Higher the credit score, the better deal you are likely secure.
Interest rate applicable on a personal loan
A rate of interest is the percentage of the principal charged for the use of money by the lender. Interest rate charged on a personal loan varies from lender to lender and is determined based on credit score, income, employment status, age and repayment capacity of an applicant. Generally, the interest rate applicable on a personal loan ranges between 10.50% to 25% in India.
Personal loan secrets you need to know
Here are some secrets that make borrowing easier and will give you an edge when negotiating with lenders.
Look beyond rate of interest
Rate of interest doesn’t give a borrower the clear picture of what your loan may cost. You should also consider other charges like processing fees, prepayment fee, late payment fees, hidden charges, and type of interest rate, personal loan EMI calculator to estimate the overall cost of a personal loan throughout the tenure.
Difference between credit score and credit history
There are differences between credit score and credit history. A credit score is a 3-digit number ranging between 300 to 900. A credit score of 750 or more is considered to be a good credit score. Credit history is a detailed account of your financial transactions, including current balance, live credit accounts, late payments or defaults, and bankruptcy. Both a credit score and history are important.
At times your application for a personal loan may be declined by a robot while applying online outside human knowledge. If you want to apply with a lender that offers preapproval, you should go through their eligibility criteria to avoid wasting time on an application that goes nowhere.
Popular personal loan myths
Here are some most common myths around a personal loan:
It is the most assumed misconception that a personal loan is used for personal purposes only. The truth is that personal loan has no restriction on end use; lender never asks the purpose of availing a personal loan while approving it.
Only salaried employees can get a personal loan
It is a widespread misconception that only salaried Indians can get a personal loan. Whereas, private businessmen and NRIs can also get a personal loan. Even some lenders offer a personal loan against house rent income.
Poor credit score makes you ineligible for a personal loan
A poor credit score can affect your personal loan eligibility negatively to some extent, but it doesn’t eliminate your chances of getting a personal loan. Factors like your income, professional profile, repayment capacity and your past financial behaviour can improve your personal loan eligibility. However, rate of interest on a personal loan you are applying for can be much higher.
Personal loan is getting more popularity, especially among young professionals, due to a wide array of benefits you can see. In recent years, the use of a personal loan has surged manifolds. Because of simplified application, unsecured nature and freedom of using, a personal loan is the most preferred financing option when people face financial problems.