Are you planning to buy that car of your dreams, but falling short of ready money? Personal loan is what will bail you out of the sticky situation. And don’t be apprehensive because you will be glad to know that an increasing number of customers are now taking personal loans for their purchases, especially the big-ticket ones. Given the huge market and the options available to them, it is really no wonder.
Personal loans are helping people meet any shortfall they experience in running their households, buying a house or a car, in children’s higher education or even in medical emergencies. Here’s a low down on personal loans to understand them better.
What is a personal loan?
Personal loan is an unsecured loan taken by people from a bank or a non-banking financial company (NBFC) to fulfill their needs. The institutions grant this loan on the basis of criterions such as income level, credit and employment history, repayment capacity, etc.
Unlike a home or a car loan, a personal loan is not secured against any asset which means that in case of a default, you cannot auction anything you own. The interest rates on personal loans are higher than those on home, car loan or gold loans because of the greater perceived risk to the lending party.
But since a default will go down in your credit history, it can create problems for you in the future, when you apply for credit cards, engage in any financial activity related to banks.
When can you avail a personal loan?
As the name suggests, personal loan can be used for any personal financial need and the bank will not monitor its use. It can be utilized for buying or renovating your home, for marriage-related expenses, a family vacation, your child’s education, purchasing cars, gadgets or home appliances, meeting unexpected medical expenses or any other emergencies or even in investing in business.
Some of the categories of personal loans you can avail are: Marriage loans, Home Renovation loans, vacation loans, consumer durable loans, festival loans amongst others. For a specific need, such as buying a car, banks also give you an option to avail car loans.
Who all can avail a personal loan?
Anyone who has a regular income source, whether you are a salaried individual, self-employed business person or a professional can avail the loan. Mostly the general criteria include your age, occupation, income, capacity to repay the loan and place of residence, though these can vary from bank to bank.
What is the maximum loan duration?
The duration varies as per the type of personal loan you choose. Loans can be 1 to 5 years or 12 to 60 months, on a case by case basis.
How much can one borrow?
This will depend on how much you earn annually and can vary based on whether you are salaried or self-employed. As a general practice, banks plan the loan amount in a way that your EMI isn’t more than 40-50% of your monthly income. Also, you current financial history—existing loans, are taken into account, to reach a figure.
From which bank/financial institution should one borrow?
Compare the offers of various banks before you settle on one. Some key factors to be taken into consideration are interest rates, loan tenure, processing fees (which gets waived off in some cases), prepayment of foreclosure charges, tax benefits you can avail (for e.g. in case of home renovations/down payment, you may be eligible for I-T deduction under Section 24) and how long the bank will take to release the payment.
A watch out here is that do not necessarily go in for a low EMI offers since you may sometimes, end up paying more interest to your lender if you choose low EMIs. So use online tools like the personal loan EMI calculator to find out your interest payout over the loan tenure and your repayment capacity before taking a call.
Therefore, do your research thoroughly before deciding on a financial institution for your loan requirement.