Things you will know after reading this article:
- What is a personal loan?
- Difference between personal loan and vehicle/home loan
- Eligibility for availing a personal loan
- What is credit score? How is it calculated?
- Documents required
Personal loans are gaining importance in today’s world, as many families are opting for a personal loan when it comes to a big purchase, or to fulfill their children’s demands, for purchasing a home or a vehicle, basically to cover any shortfall that may come up. People also prefer using the EMI (Equated Monthly Installment) scheme, most commonly for the purchase of electronics or furniture.
Usually a personal loan is often confused with that of a vehicle loan or home loan. There are two major differences which can be identified between a personal loan and a vehicle/home loan:
- Personal loans are unsecured, which means the loan is not secured or backed up by collateral like a financial asset or any personal asset who’s liquid value roughly equals to the amount of the loan. Whereas, a vehicle loan or a home loan is secured by a personal asset or the asset itself for which the loan is to be sanctioned. In a secured loan the full ownership of the asset belongs to the person purchasing it only once the loan is repaid.
- Rate of interest in a personal is high compared to the ones in a vehicle loan or a home loan, this is because the loan is unsecured and the high risk the bank takes while sanctioning it.
Since sanctioning a personal loan mostly in the form of EMI sounds so easy and convenient nowadays, can anyone get a loan? The answer is a yes, however there are a few criteria one should fulfill. The following criteria are written on the basis of ongoing criteria required by several banks, and this is a generalized list it may differ from lender to lender:
- Minimum age limit- usually the banks or lenders have a compulsory age bracket for the sanctioning of a loan for example 21-28 years of age.
- Maximum age limit- banks also have an age capping on the upper age limit, people who have completed their work years, retired, banks do this to ensure the repayment of the loan as a working individual provides a flowing income and the assurance of paying the loan.
- Employment- the individual MUST be employed, or working experience of 2-5 years.
- Minimum monthly income- this criteria differs from bank to bank. For example some banks have set their minimum monthly income to at least Rs. 5000, while some banks have it as Rs. 20,000. The minimum monthly income also varies according to the city the individual resides in.
- Work experience- this is usually set to 1-3 years, however it depends upon the lender mostly.
- Maximum EMI- maximum EMI is calculated upon the monthly income of the person. Usually the maximum limit goes up to 65% of the individual’s salary, leaving a window open for the timely payment of the loan and lowering the risk.
- Housing status- if you’re residing in your own home the chances of your loan being sanctioned increase. The fact that you own a house, means there is no amount of rent going into the disposable income.
- Credit score- it plays a vital role in getting a personal loan, as it may considerably lower the interest rate. The amount of loan and its tenure also get affected by this factor. It is favorable to have a credit score above 750, it will make getting a loan easier.
Wondering how your credit score is calculated? Well, here are the major components which together account as your credit score-
- Payment history (35%)
- Amount owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Type of credit used (10%)
Now we know who is eligible for availing a personal loan, and what are the criterias one should fulfill. Let us discuss the documentations required:
- Identity – Voter ID/ Passport Copy/ Driving License / PAN Card (any one)
- Address – Passport Copy/ Utility Bill (Electricity, Water)/ Rental Agreement/ Ration Card (any one)
- Income (depending on type of employment) – Latest Salary Slips (3 months) / Bank Statements (3 – 6 months) / Passbook (3 – 6 months)/ Current Salary Certificate (any one)
- Tax paid – Latest Form 16/ Income Tax Return
- KYC Documents – Address proof, proof of date of birth, identity proof
Personal loans belong solely to you, and the bank does not monitor its uses. The funds can be used for any purpose, ranging from fixing your car to buying an electronic item. By keeping all the formalities in mind, and maintaining a good credit score one can easily avail a personal loan and complete any task at hand which requires funds.