Do you find your finances in a spot of trouble? Are you wondering how you can for your home renovation? Personal loans could be the solution to most of your financial worries. But before you apply for one, you need to understand how personal loans work, and what are their pros and cons, to determine if they are the best option for you.
What is a Personal Loan?
A personal loan is a general purpose loan that can be issued by banks, Non-Banking Financial Companies (NBFC), and other financial intuitions. They can be used to fund any expenses because there is no restriction on how you can use the money.
Key Features of a Personal Loan
Low-Risk Line of Credit
Most personal loans don’t need any collateral. An unsecured personal loan is issued based on your creditworthiness. This makes them a low-risk option. But remember that any instance of late or non-payment will reflect on your credit report. However, there are certain banks that offer personal loans against collateral. It is a good idea to apply for a secured personal loan if you don’t have an established credit history.
Rate of Interest
Banks charge a higher interest rate for personal loans because they don’t have any security if you don’t pay back. In case of home loans, financial institutions can repossess your home to recover the money. Since such a solution is not available for personal loans, you end up paying a higher rate of interest.
Another aspect to know is that the personal loan rate of interest is usually fixed. This means that you will have to pay the same amount each month until the end of tenure.
No Restriction on the Usage of Funds
An important feature of personal loans is that you can use the money however you please. General purpose loans can be very useful in different situations because banks do not get a say in how you can utilise it.
Minimum Documentation and Easy to Apply
Banks have made it relatively easy to apply for personal loans. You don’t have to submit a long list of documents, and run around to get approval. Most banks only ask you to submit:
1. Application form
2. Salary slip
3. Identity proof
Not just that, the processing period has also been reduced to make sure that you don’t have to wait for days to get funds in case of an emergency. It usually takes 3-4 days to get the loan approved.
Uses of a Personal Loan
Although personal loans can be used to pay for any expense, here are some of the most common reasons for applying.
If you or your family member is in need of medical care, you can take a personal loan to pay off the bills. If you don’t have insurance, hospitalization and medical costs can leave you strapped for cash.
Settle Credit Card Debt
Do you need financial assistance to pay off your credit card debt? One of the most popular ways of utilising a personal loan is debt consolidation. Since personal loans are offered at a lower rate of interest than credit cards, you can use it to settle your debt and save on the interest.
Funding for Business
You can take a personal loan to get your business off the ground. If you are wondering why not take a business loan, there is a good reason for it. In order to apply for a business loan, you will need to submit business plans, company’s bank statements, financial documents, and more. Most new companies do not have all these documents. For nascent businesses, you might find personal loans to be more suitable.
Factors that Determine Your Eligibility
Having understood how personal loans work and what they can be used for, let’s see how banks decide if you are eligible to apply for one.
1. Since most personal loans are unsecured, one of the most important factors that banks consider for eligibility is your credit score which includes:* The types of debts you have – a mix of loans and credit cards is a good indication that you can handle different types of credit lines.
2. Your repayment history – whether you have made all your payments on time or missed determines how reliable you are.
3. Total amount of debt – how much money you owe in total is calculated to make sure you can keep up with the payments.
4. New credit lines – if any of your earlier card or loan application has been turned down, banks will look into the reason for rejection.
Your employment plays an important role in determining your repayment capability. Facts that are taken into consideration are:
1. Duration of your employment.
2. Stability of your employment.
3. The company you work for.
4. The financial stability of your company.
5. Your monthly income.
Armed with this information, you will now able to decide whether to opt for a personal loan or not. You will have to do some homework to understand the terms and conditions of the loans offered by different banks. In order to choose the best loan for you, you can use a comparison site that offers all the details.