You can get a personal loan for various reasons ranging from managing the unanticipated emergencies like a medical costs to meeting your dreams like financing a wedding arrangement, dream vacation, higher education, and others. A personal loan provides you with the liberty to use the loan amount to mitigate your lifestyle aspirations and financial obligations. Note that in the year 2020, personal loan applications rose by around 48 percent as an increasing number of seekers realized its utility and value. Additionally, digital-first financiers such as IIFL and private banks like HDFC and others strived hard to make the loan accessible instantly. Note that through pre-approved personal loan offers, you can avail of the loan proceeds of a personal loan instantly. Also, personal loans may be available at a reasonable interest rate. HDFC personal loan interest rates start from 10.50 percent p.a. onwards, while Axis personal loan rates start from 10.49 percent p.a. onwards.
How does a personal loan work?
A personal loan is highly notable for its simplicity and versatility. A personal loan typically is unsecured in nature, so the applicant may not require providing any security or collateral. Given these loans can be used for various purposes, from repaying full debts to planning for your future, sanction proceeds are open-ended with zero restriction on the fund’s end usage.
A few of the crucial terms included in personal loans are:
Loan repayment tenure: The number of years that it takes to repay the personal loan.
Interest rate: The rate of interest at which you must pay, which is over your loan amount.
EMI proceed The monthly repayment (principal + interest component), which must be paid.
If the seeker qualifies the eligibility criteria set by the lender, they will receive the application form, which must be filled up to apply for the personal loan deal.
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When must you apply for a personal loan?
To make instantaneous purchases: Are you looking to shop something through the online platform or want to book a trip with pals instantly? You can use a personal loan to fund such purchases. Moreover, a personal loan can assist bridge the gap in cash inflow closer to the month end before the next salary gets credited.
Pay your household expenditures: No matter whether it is home renovation or a requirement to buy household appliances or any other goods, you can avail a personal loan for the purpose. You can also avail of a tax deduction on a personal loan if you use the proceeds for meeting your household expenditures.
Crucial factors to consider for a personal loan:
Strong credit score
A strong credit score plays an important role in availing of instant loan application approval. Major parameters considered when computing your credit score are your repayment history, your debt-to-income ratio, credit utilization ratio etc. If you are punctual in repaying your outstanding dues on time, you may enjoy faster personal loan approval. Credit score ranges anywhere between 300 and 900, and lenders usually prefer disbursing loans if your credit score is 750 and above.
Major ways of improving your credit score:
1) Ensure to repay your previous loans in full before placing a loan application.
2) Make your timely credit card bill repayments and existing EMI repayments instead of just repaying the minimal required amount to avoid a heap of debt caused owing to accrued interest component on the outstanding loan proceeds.
3) Ensure that just 30 percent of your credit card limit is used to enhance your credibility.
Income
Income is another crucial parameter for deciding your personal loan eligibility. The higher your earnings, the higher your possibility of making repayments timely. For the self-employed individual, the minimal annual income required for a loan is a little higher than salaried individuals.
When you take a personal loan, you repay it in the form of easy EMIs. Adequate income means you have sufficient funds for your basic household necessities, paying your EMIs and lifestyle expenses. For simple processing of your loan application, your overall monthly EMIs should not be more than 35 percent of the monthly income.
Based on your salary, your FOIR (fixed obligation to income ratio) must be less. To reduce your FOIR, it is crucial to figure out your additional income source or clear off your existing EMIs. Reducing FOIR enhances the chances of your personal loan application approval.
One crucial tip you must note is that while placing your loan application, you must mention all your income sources, including your rental, freelance income, and part-time income. This would show that you can repay the loan with adequate earnings from additional sources.
Also, when you avail of the loan, you must ensure to avail just the loan amount, which you can repay as per your repayment capacity. For this, you can take the help of an online HDFC personal loan EMI calculator to calculate your EMI and tenure as per your repayment capacity. Doing so will allow you to avail yourself of just the loan amount for the tenure you can afford to repay.
Good banking record
Optionally, you can upload a three-month bank statement to show your banking record. Monthly statements determine your debit and credit transaction history, which assists lenders in observing your repayment record and average balances.
Do not apply with multiple lenders.
When you place an application for a loan, the lender raises the inquiry with the credit bureau regarding the risks involved. Such formal inquiries are also called hard inquiries, which get listed in your credit report. This further results in a reduced credit score, and you get viewed as a credit hungry individual. To avoid being addressed as a credit hungry individual and facing loan rejection, ensure not to apply with multiple lenders in a short time span.
Required documents
Personal loan application approval depends upon various factors, and one such factor is relevant and right documents. Lenders check your documents initially to know you and cross-check that the details mentioned on the application form you are accurate. There are 3 major documents required for personal loan application processing. These include government-issued identity proof for KYC, address proof and passport size photo.
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Other important parameters to qualify for a personal loan
∙ You must be between the age range of 18 and 65 years.
∙ You must earn a monthly income of nearly Rs 25,000.