Life is uncertain and due to this uncertainty we can face any urgent need of funds. These funds can be needed for a short term and within a short time too. A medical emergency, fees for higher studies, a vacation or sudden expenses can arise at any point of time and this can lead us to search for money lending options.
A personal loan is money borrowed from a Bank or any other financial institution which you have to repay as an EMI over the period of two to five years. A personal loan is an unsecured loan and is not backed with any collateral or security. When a loan is backed up with a security it becomes a secured loan; it is cheaper and you risk your asset as you may lose your asset if you default. A personal loan being unsecured is costlier and the rate of interest ranges from 11% to 30%. Personal loan gives you the freedom of using the money borrowed as per your choice.
But if we compare with a credit card, than yes, personal loans are cheaper and limit to borrow is also higher. If you are carrying outstanding balances on multiple high interest credit cards, a personal loan can help you consolidate them in one single loan with lower interest rate which in turn will be easier for you to manage.
Banks and other financial institutions look into different factors before approving your personal loan application. These factors include your age, credit score, credit rating and debt to income ratio. It won’t be a surprise to know that the consumers with excellent credit score receive the lowest rate of interest. Though, Banks also offer loans to the consumers with a credit score of 600 or below and the consumers who do not qualify for the personal loan are offered a secured or a co-signer loan.
Due to the sufficient availability of Banks/ NBFC’s and other financial institutions that offer unsecured loans, you need to be sure with the lender you chose. You must compare the interest rates offered by the multiple lenders before choosing the best for you. You can also visit the website of Mudra Homes to compare the available rate of interest. Mudra Homes also provide you the facility to check the eligibility for the personal loan.
Eligibility refers to the amount that you can borrow by satisfying the terms and conditions of the lender. Your eligibility proves that you are not a risky borrower and you will pay your monthly installments on time. There are different methodologies followed by different lenders to calculate the eligibility for personal loans as well as other financial instruments.
Methods for Calculating Personal Loan Eligibility
Multiplier method is a simple formula used by most of the Banks and other financial institutions use to calculate the eligibility for personal loan. The formula states that the net salary of the borrower is multiplied from any number between 9 and 18 (Multiplier method = net salary x a number from 9 – to -18). This calculation will be applied or not depends on the organization, its stability, growth and turnover with which the borrower is associated.
Income and Debt Ratio
Income and Debt Ratio also known as FOIR (Fixed Obligation and Income Ratio) denotes the fixed EMI’s that you have to make towards your existing debts like personal loan, home loan, business loan or even a credit card. For an average earning consumer the eligible FOIR is 50% – 60% whereas Banks and other financial organizations also consider FOIR up to 75% in case of very high monthly earnings. Income and debt ratio is calculated as sum of your existing debts divided by net take home salary (FOIR = sum of existing debts / net take home monthly salary). FOIR is calculated to be assured that you are left with sufficient money to bear your other regular expenses after paying your monthly EMI’s. FOIR is a popular tool to calculate the eligibility as it gives the clear picture of the borrower and helps them to decide how much a borrower can afford to pay as an EMI along with other EMI’s.
Apart from Company’s performance, individual credit rating of the borrower is also important. An applicant with higher credit ratings has an increased probability of being approved along with flexible options on amount, interest rates, EMI and tenor. In case of poor credit history, that reflects default payment tracks, huge outstanding loan amount, fraudulent track records, the Bank holds every right to cancel the loan application or charge higher rate of interest to lower its own risk.
Employment stability is a crucial aspect to be considered for personal loan. Unless the salaried borrower is not employed for atleast 2 years in the current profession and the self employed is earning for 5 yrs, the consumer is not considered as eligible for the personal loan. However, this also have a second side of the coin and depends on your current company and the annual compensation, if you are employed at a management level with a top notch company what it seems to have a promising and stable career ahead.
Documents play a vital role to put you in a safe circle. Valid and appropriate documentation leads to a positive response from the lenders and gives your clear picture to them. The following documents are needed when you take a step towards the application for the personal loan:
- Identity proof (passport, voter card, adhaar card, pan card, driving license)
- Address proof (latest electricity bill, ration card, passport, adhaar card, rental agreement)
- Financial Statement (latest 3 months statement or 6 months passbook of the Bank)
- Recent salary slips in case of a salaried
Though it is difficult to take a first step, but remember even if you cannot speed-up your credit history, others may become a decision maker for you and this can seriously impact your ability to move ahead in life. We cannot fix what we don’t face, so the first step is to take your decisions wisely. Borrow a loan when you really need it. Borrowing a loan to fund your vacation isn’t a good idea at all and defaulting is definitely not. Borrow a personal loan but also take a long look at your credit score and credit report, reminding yourself that this is just where you are starting from and not where you are going.