Every day hundreds of individuals sign up for personal loans. Buying stuff on EMI is more common these days. No more we wait for saving up the money, instead of borrow loans for education, marriage, vacations, medical needs or to renovate your home. It’s easy to pay it off in installments. Often what we save up in little amounts over a long period of time gets used up and we regret it later. Personal Loans are an easy hack to this problem. Here, I am going to tell you things you need to know before you are ready to sign for a personal loan. It is not easy to get a loan sanctioned but it is not as hard as you might think.
What is a Personal Loan?
A personal loan is different in the way it is not secured against an asset. The lender cannot auction anything in case of default as there is no collateral put. The personal loans are offered on high interests than that on loans availed keeping a home, gold or car, etc. collateral.
A personal loan is not monitored by the bank. You can use it for your requirements. It can be for investing in a business, to cover expenses in a marriage, for planning a family vacation, buying electronic gadgets, home appliances, medical expenses to name a few.
Things You Need to Know Before Applying for a Personal Loan
The easier part is to find a loan provider. More difficult than that is finding a suitable loan provider. But to borrow your first loan without committing mistakes such as paying higher interest than you needed to and getting fooled by seemingly lower rates only to get caught up in extra charges making up a larger principal due amount, you need to do some research. There are certain business terms you need to know of. After that, we will go through tips to make borrowing money a child’s play for you! (One that needs you to work as an adult to pay it off though!!)
Criteria of Eligibility to Apply for a Personal Loan
Am I eligible for a personal loan?
It varies from bank to bank. The different bank has different policies generally conditioned on your age, occupation, residence and your capability of paying it off – your income.
How old should I Be to Borrow a Personal Loan?
Varies from bank to bank, but usually, you should be aged between 20 and 60 years old to avail of such a loan.
What is Income Criteria for a Personal Loan?
To start with, your income source must be regular. Also, the company you are employed in pays an important role in addition to your credit history which determines your credit score. Many banks can need you to work from the same company for two years before applying for a loan. The methods of determining if you have a regular income source varies.
What is Minimum Income to Apply for a Personal Loan?
The minimum salary that makes you eligible for borrowing money without keeping anything as the guarantee is different in different cities. Check the eligibility for your city.
Documents Required When Applying for a Personal Loan
This list is inclusive and some banks can demand different documents.
- KYC Documents for instance Aadhar Card, Driving License, Voter ID.
- Last 2 Months’ Salary Slip.
- Employer Identity Card.
- Salary Statement of the Last 3 Months from Salary Bank Account.
Annual Percentage Rate(APR)
The rates of personal loans are essentially higher, often between 11% to 19%. The rates offered are dependent on credit score, income, loan amount, tenure duration, and your credibility.
Fixed-Rate Vs Floating Rate
Fixed Interest Rate
The interest rate is constant in the case of a fixed interest rate. For example, if you borrow a loan at 14%, it will be constant through the tenure at 14%. However, eliminating the risk factor in regards to fluctuating interest rates often means the loan is a little costlier and you don’t get to benefit when the market is cheaper.
Floating Interest Rate
In the case of variable interest rates, the interest rates are not fixed. The loan sanctioned this way is cheaper generally. Try to secure a loan at a lower rate, say 11.5 %, and if the interest rate increases by 2%, you still save one percent against a fixed interest rate of 14%.
The credit score is pivotal to banks deciding if you are eligible to get the fund. Generally, many conservative institutions offer loans to individuals with a score of 690 and more. It can get higher than 700 as is the case with Best Egg.
How do Loan Providers decide the Credit Score?
Your credit score is your credibility measurement. Loan Providers certain factors to determine a credit score.
- Your repayment history, your credit card bills, and previous loans. Whether you paid on time?
- The types of credit you carried for example credit, mortgage.
- Negative marks such as bankruptcies and foreclosures.
- Your credit score can change every month
- The credit score displayed by different federal credit reporting companies might be different as they would have collected different sets of personal information to calculate the credit score.
Principal Amount Due
What you borrow from a lender is the amount you get, but you pay back a lot more than that. The major difference between what you take and what you repay in case of a personal loan is the interest. The principal amount due, ins simple terms, is the total money you payback.
In addition to the interest on the loan amount, the lender charges 1 or 2% of the loan amount as a refundable charge, usually, to take care of all the paperwork and transaction.
Equated Monthly Installment(EMI) is the amount you are paying every month for your tenure time in installments to pay off your loan.
Now calculating EMI is a little tricky. The lenders often offer EMI calculators on their website, but this is the general formula to predict the EMI.
EMI = [P x R x (1+R) ^N]/[(1+R) ^N-1]
Analyze Total Costs
The costs over the personal loan are the interest rate, the processing charges, fee for prepayment and late payment. Regarding the interest rate, consider if it is fixed and floating. Even in case of a floating rate, there would be minimum and maximum limits. The processing costs are often one or two percent of the loan amount, but it should not be more than 2.5%, that would be too much. Analyze all the fees like for paying late and prepayment, if any.
How Much Can I Borrow in a Personal Loan?
This depends. The usual figure I can give is between $1000 to $25,000. However, for borrowing a higher amount of money you will need to provide a guarantee. There are larger banks that might allow as much as $50,000 but that for the regular customers and they have a lot of terms and conditions you have to follow which all comes down to the question – If they trust you enough to loan you such a huge amount of money.
Your credibility plays an important role. Bad history doesn’t keep you from the small loans but you’ll have trouble sanctioning large amounts.
For every loan provider you decide, you can read their policy to get the exact figures on how much you can borrow in a personal loan.
How Long Can I Take a Loan for? – Tenure Duration
Usually from 2 to 5 years or 12 to 60 months. But this is up to you. Ask another question How long would I take to repay? After getting an idea of when you will be able to pay the loan back, you can choose the tenure time, generally between one to years.
How to Choose a Loan Provider?
When choosing a loan provider, analyze these details firstly.
Is the personal loan for you?
- Are you eligible for the loan?
- Does the company offer as much money as you want?
- How long do they give you for repayment?
What is the interest rate on the personal loan?
What are the extra charges the company takes on a personal loan?
What are the terms of agreement over a personal loan?
The easiest way to get a personal loan is from your bank. If you are eligible for a loan from your bank and the interest rate, charges and agreement terms are okay with you, then you are lucky. Availing a personal loan from the bank you have used for a while takes the minimum time.
In many cases, you can complete some requirements and get your bank account ready to get a personal loan in case of emergencies in minutes.
How to Apply for a Personal Loan?
The procedure of the loan application is simple and needs you to fill application forms and submit some documents. We have already talked about the documents you require while applying for a personal loan.
- Fill the forms of personal loans which are usually online.
- Attach the required documents such as personal identity and employment details.
- Submit the required documents to a representative when contacted by the company.
- Your loan should be approved on a working day.
This is the amount you finally get in your bank account after the loan is approved and successfully disbursed.
Usually, the amount in case of a personal loan is disbursed in 24 hours. While it may take a day to get the money in your account, the loan approval lets you know in less than half an hour if you should wait.
When You Fail to Repay Personal Loan in Time
The direct consequence of this will show up in your credit score. This will reflect your integrity as a borrower.
You can take the help of the bank to make the repayment smooth for you. Don’t worry it will never slip your mind as you get a lot of notices for the overdue amount if any. If the time is a problem, you can set your bank account to automatically be deducted on a fixed date. That will take care of the installments. However, you need to consider the bounce rate before you use this trick.
Restructure the Personal Loan
You can request the lender for certain changes in the agreement conditions if you would like to.
Lower the EMI amount or take an EMI vacation to make it easier to face the economic crisis you might be in. You should increase the installment amount soon as to avoid surpassing the tenure period.