A cash crunch is not uncommon, and it’s nothing to be ashamed of. Thanks to loans and credit, there are several ways to acquire money to tide things over. If you need a large amount of money for a specific, definable reason like buying a home or your child’s marriage, several banks can offer you a loan tailored to the purpose, as long as you’re eligible. On the other hand, if you just need money to make things work, personal loans and instant loans are the best options to consider. Personal loans don’t require a specific purpose, but the paperwork and documentation required are not very different from that of home loans or car loans. On the other hand, instant loans are quick to obtain, perfect for emergencies and urgent cash needs. Here’s a guide on all you need to know about borrowing personal loans, instant loans, quick loans, or the many other names by which we refer to varieties of credit.

Qualifying for loans

Applying for an instant personal loan doesn’t automatically get you one. Lenders are giving you money on the assurance that you would pay them back, so while granting you a loan, they would need to ensure that you’re capable of repaying the money. This capability is tested with the help of the following:

Income 

Your income is one of the most important criteria for a loan. Lenders need to ensure that you have the capacity to repay the loan they give you, which is more likely if you have a steady income. Depending on the amount you wish to borrow, the amount you earn would also matter. 

Age

Your age isn’t typically much of a problem, as long as you’re above 18. However, lenders are more likely to give you a loan if you have a long working life ahead of you rather than if you’re close to retirement. However, freshers are less likely to get loans than people with at least 2-3 years of work experience.

Credit score

One of the most important factors that help decide your eligibility for a loan is your credit score. This depends on your credit history, a record of your previous borrowings (if any) and your repayment record. It helps lenders gauge whether you would repay loans on time, based on your track record. A high credit score makes it easier to get loans approved, and a credit score of 750 and above is considered great.

Employment

Lenders are usually concerned with your employment status as it relates to your ability to repay loans. A steady source of income is preferred, which relates to a steady job. If you’re self-employed, that’s okay as long as your income is steady. 

Elements of a loan

Interest rate

Money doesn’t come for free, of course. Loans, when returned, have an extra charge attached to them, called an interest. This is usually a proportion of the amount borrowed, and in case of personal loans, it remains fixed over time. For home loans and other such long-term loans, the interest rate may change or fluctuate. Since personal loans are usually unsecured, they typically have a higher interest rate compared to secured loans like home loans. The rates, at present, range from about 10-15% for personal loans taken from banks, while for personal loans online, the rates are a little higher.

APR

APR, or Annual Percentage Rate, is a term used to denote the actual cost of a loan. Typically, this APR includes the interest rate and any other fees to be paid while taking the loan. Such fees include the fees used to set up the loan, processing charges and service charges. Rather than comparing personal loan interest rates or EMIs, it is often useful to compare APRs while choosing where to borrow from.

Borrowing minimum/maximum

Lenders often have a lower and/or upper limit on how much they would lend, especially in a personal loan. Typically, banks ensure that the loan amount (principal) is such that the EMI is not more than 40-50% of your monthly income. Any loans you may already be repaying are also considered while calculating the maximum amount. If you’re self-employed, banks calculate your loan amount based on your most recent profit earned, taking into account any liabilities you may have. Further, most banks have a minimum loan amount of around Rs. 30,000. Online instant loan portals, like banks, may also have a minimum and maximum, although the minimum is usually lower. For example, EarlySalary gives loans of amounts anywhere between Rs. 8000 to Rs. 2 lakhs. 

EMI

EMI stands for Equated Monthly Instalment, which is a fixed amount to be paid monthly to the lender. It is calculated according to the principal, interest rate and the duration for which the loan is taken. The calculations are not the simplest to undertake, so there are several personal loan EMI calculators available online to make it easier.

Loan Term

Loans are usually given for a specific period in which the amount is to be repaid with interest. The term varies based on the amount, lender and the EMI you would be comfortable with. Low EMIs are often associated with longer loan terms or low-interest rates. It is advisable to ensure that if it’s the former, you’re not paying higher interest in the long run. 

Deciding your lender

There are several banks, credit unions, private lenders and now, online portals that provide loans to borrowers. With the huge variety to choose from, it can become difficult to decide where to borrow from. There are online platforms available to help you compare different lenders and make your decision. There are several factors to consider for this. Of course, the interest rate and loan amount are two of the most important of these factors. 

However, other factors that need to be considered are the tenure of repayment, type of interest (fixed or floating, although personal loans interest rates are usually fixed), extra fees like processing fees or service charges, prepayment penalty, etc. Additionally, you also need to consider your own credit score and eligibility and the urgency of the loan requirement – if it’s not very urgent, banks and credit unions are good options; if it is urgent, getting an instant loan online is the most dependable option with chances of getting approved quickly.

Application process

Documents typically required for a bank loan
source: cleartax.in

When you apply for a loan, you need to first ensure that you’re eligible for it. Of course, just meeting the eligibility criteria doesn’t guarantee approval, although it strengthens the likelihood of getting the loan. You need to show the lender that you can afford to repay the loan without straining your budget too much. Such proofs are demanded and verified through an application process. The length and difficulty of the process depend on the lender, with banks and credit unions requiring more detail and online loan portals causing less hassle by prioritizing speed. Following are the documents you’ll need to keep in hand:

  1. Income proof: A salary slip for salaried employees and a recent acknowledged Income Tax Return (ITR) for self-employed people are usually required.
  2. Address proof: Documents like Aadhar Card, Passport, most recent Electricity bill, Ration card, etc. work as Address proof.
  3. Identity proof: Documents like Aadhar Card, PAN Card, Driver’s Licence, Passport, etc. are usually considered valid identity proofs.
  4. Certified copies of degree/license are required in the case of self-employed professionals.

Disbursement

The time taken for the disbursement of loans depends entirely on the type of lender. The approval and disbursal of a loan can thus take anywhere between a few minutes to several weeks. While online instant loan apps like EarlySalary have a track record of approving and disbursing quick loans in a matter of minutes, banks and credit unions can take a week or more for the process. Once the loan is approved, you may receive an account payee cheque/draft equal to the loan amount. The loan amount would be transferred automatically to your savings account in the case of lenders like EarlySalary.

Fees to watch out for

The principal and interest on the loan are often not the only charges that need to be paid to the lenders. There may be several extra fees charged, and these are usually in the fine print. So it’s essential to read the fine print before signing on the dotted line. These extra charges include:

Origination fees

They are charged by the lender at the beginning of a loan as a processing fee to set up the loan. The fee is presented either as a flat rate or a percentage of the principal, and it’s typically withdrawn from the loan amount before it is disbursed. The fees usually range from 1-6% of the principal and is considered in the APR. It is advisable to factor in this fee while deciding the loan amount. 

Prepayment penalty

If you decide to pay your loan off before the loan term is complete, you may get charged an additional fee called a prepayment penalty. For banks, the penalty usually ranges from 2-5% of the loan amount remaining to be paid. In addition, there may also be a minimum number of EMIs to be paid before you can prepay the loan. Many instant loan apps in India, however, boast 0 prepayment charges, meaning that you can pay off a loan at any time.

Other fees

In addition to the interest rate and origination fees, lenders can also charge a variety of fees such as service charges, processing fees or administrative charges. These are often not explicitly mentioned while applying for a loan, and only later come up as surprise or hidden charges. So, make sure to read the fine print before applying for any loan.

Repayment

Repayment of loans is usually done on a monthly basis, for a fixed number of years. For personal loans, the period usually varies between 1 to 5 years and can be done in 12, 24, 36, 48 or 60-month cycles. Instant loans, on the other hand, are offered for even shorter periods, often for less than a year. Longer repayment periods often guarantee lower monthly payments, but it could result in higher interest than if the period was shorter. In case your loan is of a longer period and you wish to shorten it, there is usually the option of prepayment. However, most banks charge prepayment penalties of as much as 2-5% of the outstanding principal, which could increase your costs.

Additionally, repayment must be regular and timely in order to avoid late payment charges. Delayed payments would also negatively affect your credit score. Hence, it is always wise to plan the repayment well in advance, to avoid the headache of organizing your finances last-minute. Such planning can be done by creating a dedicated account for loan repayment, keeping track of deadlines through mobile reminders and the like, and choosing your tenure and hence, the EMI to be paid according to your capacity to pay.

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