A Personal Loan is sanctioned by banks or other lenders to individuals for personal use. Unlike a home loan or auto loan or student loan, there is no restriction on how you spend a personal loan. Typically, a personal loan is used for a large temporary expense like a child’s wedding celebration, or medical emergency or even a vacation.
A personal loan is also different from auto/home/gold loans in that there is no collateral involved. The lenders do not hold any security deposit in case you default on your loan. However, defaulting can have severe long term consequences – your credit score will drop, the default will be noted on your credit report, and you will find it difficult to obtain loans in the future.
If you do not have any assets to pledge as collateral for a loan and you need money in the short term, then a personal loan might be a good option. In order to safeguard their money, lenders will instead study your credit and repayment history to judge if you are a low-risk customer and decide whether to approve your application.
What are the eligibility criteria to get a personal loan?
The primary criteria to get a personal loan approved are a
1. A stable and sufficient monthly income
The minimum salary requirement differs from lender to lender. It is best to check each lender’s criteria directly on their website to see if you meet their requirements for a personal loan.
Similarly, the loan amount depends on your income. Lenders want to make sure that your income is adequate to make repayments on your loan as they do not have any collateral in case you are unable to make your payments.
2. A good credit score of 750 or above.
As there is no collateral, your credit score is a very important factor when lenders decide whether to approve the loan. Make sure that you stand a good chance of qualifying before you apply for the loan. Being rejected means that your credit score will drop and that you will find it difficult to be approved for another loan.
In case you are rejected, it is important to make sure that you improve your credit score to 750 and iron out any weaknesses in your credit report before you apply again. If you apply to another lender with the same score, you run the risk of being rejected again, which will further damage your credit score. Improving your score before applying again will maximise your chances of successfully getting a personal loan.
What are the advantages and disadvantages of a personal loan?
The advantages of personal loans are that they are relatively quick (because they do not require as much documentation as a home or auto loan); there is no restriction on how you can spend the money; and they 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.
How do I apply for a personal loan?
You can either approach a bank directly with all the documents or you can apply for a personal loan online and the bank/lender’s representatives will contact you.