A personal loan is a non-mortgage loan borrowed from a bank or non-bank financial company (NBFC) to meet personal expenses.
A personal loan is a loan from a bank or non-bank financial company (NBFC) to meet personal expenses. It has no mortgage because there is no need to pledge collateral and therefore has higher interest rates than secured “home and car” loans. A personal loan is sanctioned based on a combination of factors such as income, employment, credit history, and borrower’s ability to repay.
The borrower may use a personal loan at his or her own rate. Some may choose a personal loan to cover their travel expenses and wedding expenses, while others may use the money for medical, business, and home renovations.
Personal loans are termed from one year to five years; shorter and longer durations may be allowed in a case-by-case manner. Personal loans are usually disbursed within seven business days of application.
The interest rate of personal loans is fixed or floating. Fixed-rate personal loans have monthly installments in fixed equity (EMI) while floating interest individual loans have a floating interest rate mechanism that changes annually or every two years under the new Marginal Cost-Based Lending Interest Rate (MCLR) rule.
How to enhance the chances of getting a personal loan approved?
Personal loans are easier to earn than home and car loans, but that doesn’t mean personal loans are okay. It is important to tie multiple heads back before seeing money in one’s savings account.
Maintain good credit scores
It is impossible to emphasize the importance of good credit scores in sanctioning loans because credit scores measure borrowers’ ability to repay loans in terms of past credit history. An aspirational borrower must be at the fore-end of payments, on time repaying existing loans and installments as well as credit card fees, as a late payment can be a stain on credit history. The higher the credit score, the higher the chances of getting loan approval. Borrowing money can be easy for borrowers with Cibil credit scores in excess of 760, while those on the lower side can clear the past debt before re-applying for the loan.
Limit outstanding balances
The debt-to-income ratio (DTI) i.e. your monthly debt divided by total monthly income is a measure of how much you can afford to borrow. The general rule is not to spend more than 40% of monthly income to pay loans. The lender wants to be sure of the borrower’s ability to pay back and therefore take into account the DTI rate before deciding to apply for the loan.
Avoid multiple loan applications
Don’t succumb to the temptation of reaching out to many lenders in the hope of getting an acceptable loan there as this will hint at the despair for a loan. The exploitation of multiple loans also paints a less bright picture of a person’s financial situation, which is an early red signal for a stalking debt trap. You are a borrower who does not want to fall into such a situation. Every rejection of a loan leads to a decrease in credit scores, making it much more difficult to borrow credit in the future.
Have a stable job
Personal income is an important factor in the success of loan approval. The lender wants to make sure that you are making enough money to pay back the loan and the income stream will be constant in the future. Frequent job changes can make lenders wary of a person’s personal and financial stability. Moreover, a large drop in income or a change of job before applying for a loan may show that a person is not eligible for a responsible borrower.
Don’t rush to apply for a loan
You should keep a gap of at least 6 months between loan applications. If the application is rejected for any reason and receiving a personal loan is not a matter of life and death, you should step back before applying for the loan again. This will prove that your financial health and financial discipline are good enough to remain without a loan and therefore, the chances of getting second loan approval are better.
The bottom line is that there is no sure way to ensure that you make that personal loan. But by being careful and proactive, you can increase your chances of hearing the phrase ‘Yes’ from the lender of your choice.