A personal loan is a loan taken from a bank or a non-banking financial company (NBFC) to meet personal expenses. It is unsecured as there is no need to pledge a collateral and thus carries a higher rate of interest compared to secured 'home and car' loans. A personal loan is sanctioned based on a combination of factors such as income, employment, credit history and repayment capacity of the borrower.
A personal loan can be utilized at discretion of the borrower. Some may opt for a personal loan to finance their travel costs and wedding expenses, while others may use the money for medical contingencies, business ventures and home renovation.
A personal loan has a tenure ranging from one to five years; shorter and longer tenures may be allowed on a case-by-case basis. Personal loans are usually disbursed within seven working days of the loan application.
The interest rate on a personal loan is either fixed or floating. Fixed rate personal loans have fixed equity monthly instalments (EMIs), whereas floating rate personal loans have a floating rates mechanism that changes annually or bi-annually as per the new Marginal Cost of Funds based Lending Rate (MCLR) rules.
How to bolster the chances of a personal loan approval?
Personal loans are easier to get in comparison to home and vehicle loans, but that does not mean that getting a personal loan is a given. It is important to tie up many ends before seeing the money in one's savings account.
Maintain Good Credit Score
The importance of a good credit score in getting a loan sanctioned cannot be emphasized enough as credit score measures a borrower's loan repayment ability in terms of past credit history. An aspiring borrower should be on top of payments, making timely repayment of existing loans and instalments, and credit card dues, as single late payment can be a blot on credit history. Higher the credit score, better are the chances of getting the loan approval. Getting a loan may be a breeze for loan applicants whose Cibil credit score exceeds 760, whereas those on the lower side can clear past debt before re-applying for a loan.
Limit outstanding debt
Debt-to-income (DTI) ratio i.e. your monthly debt divided by gross monthly income is a measure of how much you can afford to borrow. The general rule of thumb is that one should not spend more than 40 per cent of the monthly income paying off loans. Lenders want to be sure of a borrower's capacity to pay them back and thus factor the DTI ratio before deciding on a loan application.
Avoid Multiple Loan Applications
Don't succumb to the temptation of approaching multiple lenders in the hope of receiving that one elusive loan as this would give a hint of desperation for a loan. The exercise of tapping multiple loans also paints a not-so-rosy picture of one's financial situation, which is an early red signal of a lurking debt trap. You as a borrower do not want to be in such a situation. Every loan rejection leads to a decline in the credit score, making it so much more difficult to get credit in the future.
Have a steady job
Personal income is a crucial determinant in the success of a loan approval. Lenders want to make sure that you're making enough money to pay back the loan and the income flow will remain constant in the future. Frequent job changes can make the lenders wary about a person's personal and financial steadiness. Moreover, a big decline in income or job change prior to a loan application can show a person in poor light as a responsible borrower.
Don't rush into loan applications
It is a good idea to retain a gap of at least 6 months between loan applications. If a loan application is rejected for whatever reason and getting a personal loan is not a matter of life and death, it makes sense to step back before applying for a loan again. This will demonstrate that your financial health and fiscal discipline is good enough to sustain without a loan and thus better the chances of getting a loan approval the second time.
The bottom line is there is no sure-shot way of ensuring that you do that personal loan, after all. But by being careful and pro-active, you can increase the chances of hearing a 'Yes' from the lender of your choice.