A personal loan is a great financial tool people use to cover major expenses or large purchases. These products come with fair interest rates, flexible repayment terms, large amounts, and payment predictability, making it easier to manage your finances and budget. As they have no specific purpose, you can use them for any personal goals you have, from education and professional courses to medical treatment or home improvements.
As the lending market evolves, people in India can now obtain a personal loan online in just a few clicks. Although online borrowing is fast, convenient, and simple, there are some factors to consider. Let's delve deeper into the process and find out what you should pay attention to before going into debt.
What Is a Personal Loan?
A personal loan is an unsecured loan offered by banks and non-banking financial institutions (NBFCs). They are designed to meet your various financial needs. Unlike car loans or home loans, where you pledge the property you buy as security, personal loans don't require collateral. This convenience comes with a price: personal loans typically have higher interest rates than secured ones. Their APRs typically range from 9.99% to 44% p.a.
Personal loans work like any other installment loan. The repayment periods are usually from 1 to 5 or 7 years. The initial amount plus interest is repaid in fixed monthly installments (EMIs) until your loan is repaid in full.
How Much Can I Borrow Online?
The average loan amount can vary depending on the lender, your income, and your creditworthiness. Most lenders typically offer personal loans from a few lakh rupees to Rs. 50 lakh or more. The exact sum you can borrow will be determined based on several factors. Here are the key things lenders look at:
- Credit score. This is a three-digit number that reflects your debt management history. A higher credit score (typically above 750) indicates a lower risk of default for the lender. Thus, people with high ratings can qualify for a larger loan amount and get potentially lower interest rates;
- Income. Your income stability and earning potential play a crucial role. By reviewing your cash inflows, lenders can see how likely you are to repay the debt;
- Debt-to-income ratio. Loan providers always assess your income along with your existing debt obligations. The correlation of your total monthly debt payments to your income is called a debt-to-income (DTI) ratio. A lower DTI indicates you have more disposable income to manage the potential loan repayment. This potentially increases the amount you can borrow.
- Employment history. Consistent employment with a reputable company indicates financial stability and reduces the lender's risk.
- Payment history. If you have a history of repaying your bills and loans on time, it builds trust and increases your chances of getting a higher loan amount.
- Loan purpose. While lenders don't dictate how you use the loan, the purpose may influence the loan amount offered. For example, loans for education or debt consolidation might provide larger amounts than those for vacation or non-essential purchases.
Why Does a Credit Score Matter?
Your credit score is one of the most important factors that guide lenders' decisions on your loan application. It acts as a numerical representation of your creditworthiness and shows how good you are in managing your finances and debts.
A credit score in India spans from 300 to 900. Here's a general guideline on how the ranges are interpreted:
- 800 and above: Excellent
- 799 - 750: Good;
- 749 - 700: Fair;
- 699 - 600: Low;
- 599 - 300: Poor.
A high credit score means a borrower is more likely to repay the borrowed money on time and in full. Thus, it translates to a lower risk for the lender, making them more willing to deal with you and offer reasonable loan terms.
How is it Calculated?
Multiple credit bureaus in India, like CIBIL, Experian, and CRIF High Mark, calculate your credit score using a complex algorithm that considers various factors in your credit history. The exact weightage of each factor may vary slightly between bureaus, but here's a general breakdown of what contributes to your credit score:
- Repayment history (35%). This is the most significant factor that demonstrates how you manage your debts and bills. Missed payments or defaults significantly decrease your score;
- Credit utilization ratio (30%). Credit utilization shows how your outstanding credit card balance correlates to your overall credit limit. It's recommended to keep the ratio below 30%;
- Credit mix (10%). Having a healthy mix of credit products, like credit cards, personal loans, and secured debts, reflects your ability to handle different types of credit;
- Credit inquiries (15%). Frequent applications for new loans or credit cards can negatively impact your score due to hard credit checks performed. It might also indicate financial stress or a higher risk of default.
- Loan age and length (10%). Having a long credit history with a mix of older and newer accounts is good for your credit.
What Do I Need to Get a Personal Loan Online in India?
While getting a personal loan online makes the process simpler, there are still several eligibility criteria and documents you need to provide. Here's what you will need to qualify:
- Age: You need to be between 18 and 65 years old (age limits may vary by lender).
- Employment status: You need to be officially employed, self-employed, or a business owner to qualify.
- Minimum income: Each lender sets their own minimum income requirement. It will also vary by your city of residence and loan amount.
- Credit score: A good credit score significantly improves your chances of approval and results in better loan terms.
Besides the criteria above, you will also be asked to provide the following documents:
- Proof of identity. A copy of your PAN Card, Passport, Aadhar Card, or Voter ID card;
- Proof of address. This could be your Aadhar Card, Passport, utility bills not older than 3 months, or a rental agreement;
- Income verification. Those who are officially employed may provide salary slips for the latest 2-3 months or bank statements reflecting salary amounts. Self-employed individuals or business owners may need Income Tax Returns (ITR) for the past 2-3 years, along with bank statements;
- Employer details. A copy of your company ID card and your latest salary certificate might be required;
- Recent passport-sized photographs. You will typically need two or three photos.
Note: Some lenders may ask for additional documents depending on your income source or loan purpose. Ensure all the scanned copies are clear and within the file size limits specified by the lender.
How to Get a Personal Loan Online: Application Steps
An online application process is known for being convenient and efficient. Here are the general steps involved:
- Compare loan options. Research and compare loan offers from different banks and NBFCs. Consider factors like interest rates, loan amounts, processing fees, repayment terms, and any prepayment charges. Many online platforms allow you to compare loan options by filling out just one pre-qualification form. This process usually doesn't affect your credit.
- Choose a lender and check eligibility. Once you've identified a suitable lender, visit their website and check their eligibility criteria. Ensure you meet their requirements for age, income, credit score, and other factors.
- Fill out the online application form. The application form will typically ask for your personal details, income information, employment details, and loan amount requirements.
- Upload documents. Carefully scan and upload the required documents as mentioned by the lender (proof of identity, address, income, etc.). Ensure the files are clear and within the specified size limits.
- Wait for loan approval. The lender will assess your application and creditworthiness. This might involve a verification call to your employer or a check with credit bureaus.
- Read and sign the loan agreement. If approved, the lender will send you a loan offer via email. Carefully review the loan offer and terms and conditions. If you agree, e-sign the loan agreement electronically.
- Get the funds. Once the agreement is signed, the lender will disburse the loan amount directly into your bank account within 24 to 72 hours (depending on the lender).
Ways to Increase Your Approval Chances
Here are some practical tips to boost your chances:
- Build and maintain a good credit score. This is crucial. Aim for a credit score above 720 to improve your loan eligibility and potentially qualify for lower interest rates. Timely repayments on existing loans and credit cards, keeping your credit utilization ratio low, and maintaining a healthy mix of credit products can all help improve your score.
- Improve your debt-to-income ratio (DTI). A lower DTI shows lenders you have more disposable income to manage loan repayments. Pay down existing debts before applying for a personal loan to reduce your DTI and make yourself a more attractive borrower.
- Apply with a co-signer. If your credit score is low, consider having a co-signer with a strong credit history apply with you. This can significantly improve your approval chances and potentially lead to better loan terms.
- Choose the right loan amount. Don't apply for more than you need. Carefully consider your financial situation and borrow only what you can comfortably repay within the loan term.
- Compare loan offers. Don't settle for the first offer you receive. Compare interest rates, processing fees, and other terms from multiple lenders. You might be able to negotiate a better deal based on your creditworthiness and by highlighting offers from competing lenders.
- Maintain employment stability. Consistent employment with a reputable company demonstrates financial stability and reduces risk for lenders.
- Submit a strong application: Carefully review the application form to avoid errors or omissions. Ensure all documents are clear, properly scanned, and uploaded within the size limits specified by the lender.
Responsible Borrowing
While a personal loan can be a helpful financial tool, it's crucial to borrow responsibly to avoid getting into debt. Here are some key tips for managing your personal loan effectively:
- Borrow only what you need. Avoid the temptation to borrow more than you absolutely require. Carefully assess your needs and stick to a realistic loan amount that aligns with your budget and repayment capabilities.
- Create a budget and stick to it. Develop a budget that takes into account both your loan payments and regular expenses. Ensure you can comfortably afford the EMIs without putting your financial stability at risk.
- Prioritize on-time repayments. Make your EMI payments on time and in full every month. Late payments can cause penalties and damage your credit score, which will impact your ability to get new loans in the future.
- Consider early repayment. If your budget allows, consider making additional payments towards your loan principal. This can help you save money on interest and shorten the repayment period.
- Avoid debt accumulation. Avoid taking on additional debt while managing your existing one. This can quickly strain your finances and make it difficult to manage your obligations.
- Communicate with your lender. If you face any unforeseen financial difficulties that might impact your ability to repay the loan on time, contact your lender as soon as possible. They might offer solutions like a temporary payment extension or a restructuring of your loan terms.
Final Thoughts
Online personal loans can add convenience to your financial life if you approach them responsibly. Before you get started, make sure you fully understand the requirements, loan terms, and the repayment schedule. Avoid unnecessary debt and only borrow what you can comfortably repay.
Also, review offers from multiple lenders and make sure you know what the market offers and your loan terms are reasonable. Keep in mind that maintaining strong credit is crucial to make your borrowing experience smooth.
FAQ
Can I Get an Online Personal Loan with Bad Credit?
Most banks require a borrower to have at least fair credit to qualify for a personal loan. However, some non-banking financial institutions consider borrowers with lower scores. Just keep in mind that having bad credit usually results in less favorable loan terms.
How Will I Repay My Loan?
The repayment is usually made in equal monthly installments within 12 to 60 months. Most lenders allow customers to set an automatic payment to avoid late or missed payments.
Where Can I Borrow Money Online in India?
There are multiple online services and institutions offering loans from the comfort of your home. Some examples include State Bank of India (SBI), Bajaj Finserv, MoneyTap, and mPokket.
What Are Alternatives to Online Personal Loans?
Other options include secured loans, payday loans, peer-to-peer lending platforms, and borrowing from family or friends.