Features and Benefits of Personal Loans
A personal loan is a loan taken by an individual to fund any personal expense like, for example, a wedding, to make renovations to the home or even for a vacation. Unlike many other kinds of loan, there is no restriction on how the borrowed amount is finally used – the borrower has full freedom to use the money for any purpose they want.
There are two attractive features of a personal loan:
i. Complete flexibility of end-use. There are no restrictions on how you should spend the loan amount. This in contrast to a home loan or auto loan where the loan amount can only be used to buy a property or a vehicle respectively. A personal loan allows you the freedom to use the money in any way you want.
ii. Lack of collateral. A personal loan is an ‘unsecured loan’, meaning you are not required to provide any security to the lender in the form of cash, shares or any other assets. This might make it more attractive to some customers who may not be able to raise the cash required as collateral.
What is the typical amount and loan period of a personal loan?
There is no typical loan amount and the loans can range from a few thousands to lakhs. While applying for a personal loan, the amount that you apply for must be commensurate with your ability to make repayments. Of course, the final loan amount that is approved depends on the lending criteria used by the bank/NBFC and how they evaluate your ability to repay the loan.
Personal loans are relatively short-term loans and the tenure can range from 1-5 years.
What are the factors that influence approval for a personal loan?
a.It is generally advisable to have a credit score of 750 or above to qualify for a personal loan. The higher your score, the better are your chances of being approved.
b.Your employment is also an important factor in the loan-approval process. Since personal loan customers do not provide any collateral, lenders need to make sure that you will have a steady job over the loan period. It is probably a good idea to be with the same employer for at least a year before you apply for a personal loan.
c.Your annual income: Again, since there is no collateral, the banks want to be assured that you have a sufficient income (from salary and other sources) that will allow you to make your monthly repayments. The higher your income, the better your chances of being approved for a personal loan. d.Your EMI payment record: Lenders will look at your credit report to check if you have consistently demonstrated financial discipline and a pattern of timely EMI payments. If they see that you have regularly made payments and fulfilled your debt obligations, they will be inclined to view your loan application more favourably.
What are the advantages and disadvantages of a personal loan?
The main advantages of a personal loan include the following:
i. Relatively quick (because they do not require as much documentation as a home or auto loan).
ii. No restriction on how you can spend the money
iii. Do not require any collateral. So if you do not have any assets like a home, or shares or gold to offer as security, and are in need of money urgently, this is perhaps the most convenient option.
The main disadvantage of a personal loan is the higher interest rate, when compared to other loans. Since the lenders do not have any security against payment default, they charge high interest rates to cover their lending risk. Personal loans can work out to be one of the most expensive loans to take in terms of interest payments.