Personal Loan 101: Explained!

A personal loan is a fund you can get from a lender for multiple purposes. It takes into account a person’s employment history, ability to repay the loan, level of income the person has, and credit history of the person. The borrower gets all the money at the same time and usually pays it back with interest till the loan is completely repaid. 

Especially in situations of a financial crunch or an emergency that requires a huge amount of money, a personal loan can be the way to go, especially since it doesn’t require any collateral as such. There is little-to-no documentation compared to any other form of loan, and this makes it the more favourable one out of the lot.

How to Know you’re Eligible for a Personal Loan?

There are a few things to think about while checking your personal loan eligibility. Although you can use an eligibility calculator online to know if you can apply for a personal loan or not, it is still a good practice to keep the following thing in mind.

• #First:

Firstly, check your credit score. Your credit score is nothing but your financial history, your history of borrowing (that is, your past loans) and repayments (whether or not they have been timely and adequate) if any. A high credit score automatically indicated better chances of getting a personal loan. Generally, the benchmark is set at a score of 750. You can still apply for a loan even below that credit score, but the interest rate would be steep accordingly.

• #Second:

The other thing to consider for a personal loan is income. The more your income, the more are the chances that you will be able to repay your loan successfully and on time. The Fixed Obligations to Income Ratio (FOIR) is ideally expected to be less if you want to avail a personal loan. In simpler terms, the total EMIs of all your loans combined for a month should not be more than 35% of your monthly income. This is to ascertain that you will still have money left to live after you’re done paying your EMIs. You can lower your FOIR by either finding an additional source of income or lowering your number of EMIs per month.

• #Third:

The third thing that affects your personal loan eligibility is who your employer is. This is because your employer is the best source for your credibility. Working in huge companies can help improve your possibility of getting a personal loan. A lender would usually prefer an employee of a multinational company rather than the employee of a small business or start-up as it is seen as a sign of a secure and stable future of the person with the organization, and hence a steady flow of good income. 

• #Fourth:

A fourth thing to consider is how stable your current employment is. Although it goes without saying, employment stability can be quite an important consideration when evaluating a person’s claim to a personal loan. Lenders usually require a career of at least two years full time in the profession that the person is employed in currently. If you’re self-employed, the lender will require proof of earnings over the past five years. The lender keeps this in mind because this can help him/her determine whether or not the borrower will be able to repay the instalments. 

• #Fifth:

Lastly, your age is also an important factor that is considered. The younger a person, the better is your chance of repaying the loan. This is probably based on an assumption that the younger population can earn better comparatively.

Conclusion:

So, to conclude, a personal loan is the easiest loan to apply for, especially in emergencies, because of the minimum documentation required and the absence of a need for collateral. However, since it is such an easy process, a few things need to be kept in mind so that you can get the best out of your experience.