Personal loans: These are the five key questions you should know before applying

If you happen to face a financial emergency or have a sudden need for money then you can explore the prospect of raising a personal loan from a financial institution.

The financial institution could be a bank or a non-banking financial institution (NBFC). A personal loan is an unsecured loan that the borrower can raise to meet an urgent financial need or to fulfil an immediate financial requirement.

However, before you decide to take a personal loan, one should be aware of a slew of things. For instance, it is vital to assess the interest rates charged by banks and the late fee charges which the bank could levy.

Additionally, one should know that there is a limit to the amount of personal loan that one can raise which could be up to 20 times the net monthly income.

These are the five questions that one should know:

I. What is the amount of loan that one could raise?

Usually, borrowers can raise personal loan for an amount upto 20 times of the net monthly income subject to the current loan obligation. For instance, if your net monthly income is ₹50,000 then one can raise a personal loan for an amount upto ₹10 lakh.

And at the same time, when you have already raised ₹3 lakh then ideally, the bank would not approve of a ₹7 lakh loan (10-3 lakh).

The idea behind this is that borrower should raise a loan which they can easily repay. If the loan obligation is more than they can easily repay then they need to evaluate the amount of loan.

II. What are the documents required to raise personal loan?

In order to raise a personal loan, one needs to show a number of key documents which include the salary slips, income tax return (ITR), address proofs and PAN. The bank could ask for some more documents such as ID card.

III. What is the average interest rate charged on personal loan?

Typically, banks charge a higher interest rate on personal loans. This could be somewhere in the range of 12-18 percent. The rate of interest could vary based on different factors including the credit score.

IV. What is the role of credit score at the time of raising personal loan?

The credit score, also known as CIBIL score, determines the rate of interest that the bank will charge the borrower. So, higher the credit score, lower the interest rate and lower the credit score — higher the interest rate.

Ideally, borrower is expected to have a high credit score of 700 to be able to apply for a personal loan. In some cases, banks can even reject the loan application in view of the poor credit score.

V. What are the reasons for which you can raise a personal loan?

Interestingly, there is no specific reason for which one should raise a personal loan. It could be to renovate the house, to spend on a wedding or to go on a vacation, so on and so forth.

As a matter of fact, personal loan is given for all the reasons which do not fall under the generic loan category such as home loan or car loan or business loan.