Personal Loan
A personal loan is a kind of loan where the credit is obtained without specifying assets as collateral, provided by financial institutions based on basic criteria like employment history, capacity to repay the money, income level, consistency in income, the profession of the person, and credit history. A personal loan is also referred to as a consumer loan that can be used to meet an immediate.
Personal loan is convenient because of the minimal requirement of documents and the method of approval is quick. Due to its high demand and ease of access, the loan amount is disbursed within a few hours provided the lender is convinced of your repayment capacity. The borrower is allowed to choose the tenure period according to his repaying capacity, varying from one to five years.
MAXIMUM AMOUNT ONE CAN BORROW
The maximum amount an individual can borrow solely depends upon his/her income level, profession, and lender’s assessment of loan application. Generally, the EMIs are based on less than 50% of the monthly salary of the borrower, pending dues are also considered while calculating the loan amount.
If a person is self-employed or a business owner, then the amount is determined on the basis of the profits earned that are recorded in the profit and loss statement of the company.
There are a few points that are to be kept in mind while opting for a personal loan agreement:
- PURPOSE OF LOAN
A person needs to be clear with the reason behind getting a personal loan. Interest rates on personal loans are very high and one individual should avoid taking such loans to the greatest extent especially for non-essential .
- CAPACITY TO REPAY
Evaluation of EMIs is an important factor because initially, a person needs to ensure that he/she will have the capability to pay the EMIs along with the interest charged.
- GOING THROUGH THE DOCUMENTS
This rule is universally applied to all documents. Meeting people brings in trust, but while signing any document one is supposed to go through each and everything.
- TENURE AND EMIs
It is advised that longer tenure along with lower EMIs are the best mode of payment. Short-term loans are more cost-effective due to low absolute payouts and the fact that the interest is not calculated over longer durations.
- DISCLOSURE OF PREVIOUS LOANS
The borrower needs to disclose any of his existing loans that are being serviced while applying for a new loan.
- AVOID APPLICATION FOR MULTIPLE LOAN
Whenever a loan application is made a soft inquiry is reflected in the credit report, and it is taken into consideration at the time of investigation for a loan.
- APPLY WITH THE BANKS HOLDING YOUR ACCOUNT
Applying for a loan in the same bank where your account is, works as an asset because the bank is already aware of the financial history and can sometimes approve the loan faster.
- TELLING ABOUT THE LOAN TO SPOUSE/FAMILY
It is advised to discuss taking a loan with family/ spouse because paying EMIs will impact their monthly budget.
- CREDIT HISTORY
The work of the lender includes investigating the borrower’s credit history, which depends upon one’s track record. A moneylender gives the loan on the basis of credit score, which is defined by the consistency of financial responsibility with a lower interest rate and faster approval process. Banks and Financial Institutions generally rely on credit ratings supplied by an organization called CIBIL (Credit Information Bureau of India Limited). A score of 750 or above is usually considered good for personal loans.
- ACKNOWLEDGING THE TERMS AND CONDITIONS OF A LOAN
Going through the documents and understanding the terms and conditions of a personal loan before signing any legal document. Usually, the part payments or the amount clauses are not disclosed unless the partial fee or the complete fee is paid.
- DEFAULT OF PAYMENTS
Borrowers are allowed for one/two repayment slips. But if the problem continues for three months consecutively then the bank has full authority to send a notice to the borrower, for the payment. A borrower is declared as NPA (Non-performing Asset) after defaulting for 90 days, restraining him from any future loans. Not answering the reminders of the bank leaves them with the option of taking legal action against them. Several penalties can be imposed over the defaulting party along with late payments.
To the last resort, left banks can rightfully take possession of the collateral and auction it to recover the loan amount if they feel that the loan amount is irrecoverable.
- RECALLING ENTIRE BALANCE
If a single installment is not paid on time, the bank/ financing institution is free to label it as a default and recall the entire balance of the term loan. There is also the fact that CIBIL ratings come down and this can render future borrowing difficult.
It is advisable to borrow an amount that is within your repaying abilities. A borrower needs to avoid unnecessary inconvenience.