Taking a personal loan for the first time can be a fairly straightforward matter so long as you keep in mind a few factors. If you are in need of money for a personal expense and do not have any asset to offer as collateral, then this kind of loan might be the best option. You, the borrower, have full freedom to use the money for any purpose you want.
There are two attractive features of a personal loan if you are in need of quick funds for a personal expense:
1. Complete flexibility of end-use. There are no restrictions on how you should spend the loan amount. You can use the loan money to fund any personal expense like, for example, a wedding, or to make renovations to the home, pay for medical expenses, or even for a vacation. 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.
2. 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.
When should I choose a personal loan?
1. If you need money quickly and for a relatively short term, then a personal loanis a good option. The loan disbursal is relatively quicker than for most other loans since you do not have to provide documentation for the purpose the loan amount will be used for.
2. If you do not have any assets to pledge as collateral for a loan, then a personal loan is a good option. In order to safeguard their money, lenders will instead study your credit and repayment history to judge if you are at low risk for default and decide whether to approve your application.
Make sure that you have a credit score of at least 750 before you apply for a personal loan to maximise your chances of success. If your application is rejected because of a low credit score, your score will drop even further with each rejection, making it even more difficult to access loans in the future.
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 thousand rupees to several lakhs.
When applying for a personal loan, make sure you apply for an amount that is possible for you to repay within the period. If you apply for too large an amount compared to your net monthly income, you might be rejected.
The tenure can range from 1-5 years.
How do I choose the best loan offer?
The only way to decide which loan offer to apply for is to research the various options thoroughly. Once you have a good idea of the offers and schemes available, you can judge which offer suits your financial situation and requirements the best.
If you are in immediate need of money and do not have any asset to use as collateral, then a personal loan might be the best option. However, it is important to keep in mind that you will be paying high interest rate charges on this kind of loan, so you should be have a plan for being able to make all your repayments on time.