Generally people apply for personal loan when they need spare cash. But personal loans dose not come cheap.
So it is better that one takes wise moves while availing personal loans.
So, what should be the step 1? People opt for personal loans rather casually.
But this is one debt that people must undertake after careful deliberation & research.
There are lot of information available on internet about personal loans.
The effort is to take your smartphone, and type in the right keywords.
A right personal loan can hugely impact ones finance for good.
But before proceeding ahead, lets first un-learn something about personal loan.
How you buy personal loan today? Go to bank and fill up an application form? Forget it.
The best way to avail a personal loan is as follows:
- Analyse your personal loan needs – careful steps.
- Check who offers best personal loans in India?
- Apply and take Pre-loan approval.
- Final step is apply for personal loan.
#A Analyse your personal loan needs – careful steps
Many people take personal loan for buying a motor bike, but end up buying a small car. This is a mistake. It is absolutely essential to first finalise the need, before getting the personal loan sanctioned.
A1. Identify the purpose of personal loan
Why people take personal loan?
People take personal loan for varied reasons. Some take this loan to manage a big, unplanned car maintenance.
People also take personal loan to pay off accumulated credit card debt.
These days, before a bank or financial institution issues a loan, the purpose of personal loan usage is confirmed before hand.
It is not common for banks to issue personal loan for ANY reason. The reason must be genuine and reasonable.
On personal side, when one knows the exact purpose of personal loan, the quantum of loan can be accurately foreseen. This is necessary for loan management in future.
A2. Evaluate the quantum of personal loan requirement?
These days banks offer personal loans on phone.
The ease with which one can avail personal loan has dramatically increased in last couple of years.
But isn’t this a good thing?
This is good, but the problems comes with the word “ease”.
When loan is available so easily, people do not think much and take loan.
It is equally important to rightly quantify the quantum of loan.
Suppose one need loan to pay-off credit card debt. Before one applies for personal loan, calculation of outstanding balance plus accrued interest must be done.
This is not difficult.
It will not require more than 30 minutes to get the calculation done and fix the loan amount.
People also take personal loan to manage upcoming major expenses like marriage, travel, home appliance purchase etc.
Even here it is very easy to quantify the amount of loan that must be availed.
The idea is that, just enough personal loan must be borrowed.
Loan should neither be less not higher than the requirement.
Taking loan approval also becomes easier if one knows how much loan is required.
Banks sanctions lower amount faster than higher amounts.
For larger personal loans, it is better to approach big banks for financing.
But for smaller loan amounts, financing can be done from elsewhere like friends, family, or from smaller institutions like Bajaj Finserv, L&T Finance etc.
A3. Quantify EMI paying capability
One must avoid a situation where loan is disbursed, but EMI comes out to be too high.
A person cannot take personal loan at an expense of ones standard of living.
If a loan makes you live a poorer lifestyle, it is better to avoid taking one.
Do your math first.
What spare money you can actually put aside each month must be known.
Open your worksheet and jot down all expenses. Compare your monthly expense with your monthly cash-in hand.
Compare the two and check if some expense from the existing list can be curtailed.
After doing this exercise, you will exactly know what spare money is available with you each month.
This spare money can be used to pay EMI of the personal loan.
This way you are paying the EMI’s but your standard of living is not getting compromised.
A4. Know your credit score
No matter how good is your math about the person loan, but if your credit score is not good, getting loan sanction will be impossible.
One can check online the credit score on website of CIBIL by payment of Rs.550. Being aware of ones credit score is considered good.
Any financial institution who has ever lended you their money will have their report in CIBIL’s report.
The bank which gave you credit card will have its report here. The bank which gave you home loan will have its report here.
The financial institution which financed your home theatre system purchase will have their report here.
The finance who finances your car will have their report here.
The cumulative of all such reports submitted by different banks and financial institutions will be compiled by CIBIL and aggregate is produced.
Generally the credit score is earned in scale of 300 to 900.
A credit score between 680 and 750 is considered safe. Last time I checked my credit score on CIBIL, I earned a whopping 840 points.
The higher is the credit score, banks can offer you lower rate of interest and host of other benefits.
It is always better to maintain a very high credit score for self.
As a rule of thumb, a credit score of below 580 points, will not be eligible for person loan.
A good credit score means, a person is more likely to payback the loan without possibility of any major defaults.
It is not that people with low credit score doesn’t get personal loans, but they have to seek more alternatives.
A person with a very low credit score can also join hands with another person (like parents) and borrow a home loan from bank.
#B Who offers best personal loans in India?
Once you are done with your home loan on personal loan requirements, its time to evaluate who can offer best personal loan to you.
There are several top banks in India who can offer best loans tailor made for your requirement.
Banks like HDFC, ICICI Bank, Kotak Mahindra, Axis Bank etc are among the preferred banks in India.
It is essential to carefully compare the offers of all banks minutely before finalisation.
People generally stop at interest rate finalisation step itself.
But it is also essential to check other parameters like:
- processing fee,
- prepayment option,
- maximum loan amount,
- maximum loan tenure,
- minimum monthly income,
- age limit etc.
Real example of comparison sheet one can make is as shown below.
#C Take Pre-loan approval from 4 Banks
Apply and take Pre-loan approval from top 4 companies as per your comparison
Generally we apply personal loan in only one bank of our choice.
But if one has a comparison sheet ready as explained above, it will be only logical to take loan approvals from at 3-4 banks before formally applying for bank loan disbursement.
To get the Pre-loan approval, one must fill up a small form (this is not like big loan agreement papers).
Fill up this small form and you are good to go.
After filling this form, the lender will verify the following:
- your credit score,
- employment status,
- income guarantee,
- personal obligations etc.
After the procedure is finished, the bank will give approval for a loan amount based on your eligibility
#D Apply for personal loan disbursement
This is the final step.
Once you are done with all research about the lender, apply for loan disbursement from your best lender (bank).
You already have pre-loan approval from this bank, hence loan disbursement will not take long time.
At this point you will be asked to fill a more detailed form (loan agreement papers).
Do not worry about this, generally banks agents does this for you.
You will be just asked to check the filled up details and put your signatures on several places.
At this stage be ready for some document exchange like the following:
- Identity proof
- Address proof
- Income proof
- Type of service & education history
- Type of company one works in (Govt, MNC, Private, Self employed)
- Bank statements etc.
After submission of all the required documents, it make take 3-5 days for loan application processing.
After the full processing is done, loan disbursement can be done the next day.
In India, loan disbursement is generally done by Demand Draft.
Though online bank transfer option is also available.
Compared to other loans like Home Loan, Car Loan, Education Loan etc, getting a personal loan is easier and faster.
But as personal loan is so easily available, it is also the most misused loan of all.
Hence I thought of writing this blog-post to make my readers aware of the DO and DONT’s of personal loan.