Manage Money

Everything You Need To Manage Personal Loans

What is a personal loan?

A personal loan is an unsecured credit that lenders give out without any collateral or security and with minimal documentation. This credit helps you meet your financial obligations smoothly and has very few restrictions on how you use it.

Let us see how a personal loan is different from other types of credit.

Documentation:

  • Personal loans- Banks and other financial institutions look at your basic information like income level, repayment capacity, employment history, and credit history, as a criterion to approve personal loans.

  • Credit cards- These are, in general, pre-approved loans that do not ask for any documentation. Even if you are not pre-approved, the verification process runs in the background with the credit information already available.

  • Home loans- These are highly leveraged debts as they involve a huge amount for the construction or purchase of a home. Lenders ask for a huge number of documents for the assurance of a strong profile.

  • Auto loans- The documentation for these loans is very minimal compared to a home loan. Basic informative documents like address, Identity, income, bank statement, etc., are generally asked for.

Type of Loan:

  • Personal loans are unsecured loans as they do not ask for any collateral or security in return.

  • Credit cards can be both secured and unsecured. You can apply for a secured credit card backed by cash deposits.

  • Home loans are secured loans as the house you wish to buy is the collateral for the amount you receive.

  • Vehicular/auto loans are also secured loans as the vehicle you purchase is the collateral to the lender.

Interest:

  • Personal loans being unsecured have high-interest rates. Depending on your credit profile, the interest can range between 13 and 22%.

  • Credit card interest rates can be lower than personal loans with rates ranging between 10 to 18%. However, there is a downside that you might end up paying more in interest on a credit card if your monthly payments are not well planned.

  • Home loans being secured have low-interest rates in the market. You can find the rate as low as 6% with the right credit profile.

  • Vehicular loans also have lower interest rates as they are also being secured. Depending on the applicant’s credit profile, the rate can range between 7-18%.

Tenure:

  • Personal loan tenures can be negotiated for a long duration. However, the common range among the lenders is set to be less than 15 years.

  • Credit card tenures are generally low. The common range is between 6 months to 2 years.

  • Home loans are well known for their long tenures among other types of credits. You can negotiate with lenders for 20 to 30 years of tenure depending on your repayment capacity.

  • Vehicular loans have low tenures by comparison. It can range from 1 to 8 years depending on your profile and convenience.

What can you use a personal loan for?

A personal loan is also called a multi-purpose loan as it does not restrict the user for any one particular use. Check out the common purposes you can use a personal loan for.

Debt Consolidation

Debt consolidation is a boon for individuals who are immersed in debt. It is quite troublesome to have multiple loans and credit card balances in your name and one mistake can lead you to spiral down into a financial burden. Opting for debt consolidation, you are consolidating your multiple credit lines into one single monthly payment. Therefore, you can use a personal loan to reduce your financial burden and have only one payment to worry about.

Emergency Funds

Emergencies take a huge toll on your financial health. It could be losing your job, health-related, loans from peers, etc. Handling these obligations might not be something your savings are prepared for. So, a personal loan with a low-interest rate can help you handle such emergencies.

Home Renovations

You could be wanting to improve your living style in your home or you might want to add resale value to the property, for whatever reasons you seem fit, home renovations are very common and in fact, can be expensive. A personal loan can help you in this case.

Relocation

House relocating is truly daunting because of all the expenses it involves. From shifting costs to minor repairs, you may come across a stressful and expensive burden. Using a personal loan you can make your house shifting a smooth arrangement.

Improving Credit Scores

We have already discussed debt consolidation and how it could help lessen your burdens. On the same note, you can improve your credit score by using a personal loan for consolidating your credits. Credit bureaus take it as a good sign when you were able to pay off your various credit lines. Similarly, if you are having trouble building a strong credit score, you can apply for an affordable personal loan and repay it. Your credit score goes up as your payment history is recorded.

Travel

Whether it is an impulsive vacation desire or a dream you want to make come true, traveling is something everyone deserves but not afford. A personal loan can help that happen. You can arrange for travel tickets, accommodation, food, travel insurance, etc.

Education

Although all lenders provide education loans, there might be cases where the student’s courses are not eligible for a loan or the educational loan amount is not sufficient. In cases like these, parents can opt for a quick personal loan that would help the transactions go smoothly.

Wedding

In India, most weddings are prestigious affairs, and families do not want to compromise on the couple’s special day. From shopping to make-up, from catering to flower decoration, there might be cases where the budget might just go overhead. A personal loan will help you meet your wedding budget requirements.

Business Purposes

Business owners find personal loans an emergency savior. There are business loans for expansion and development. However, when business owners need emergency cash for handling multiple expenses, then a personal loan comes to the rescue.

What are the factors to look for when applying for a personal loan?

Many lenders will respond positively to provide you with a personal loan. Being an unsecured loan, they check for a decent profile with the right credit history. However, they charge you high-interest rates for the same reason. It is up to you in choosing the right lender for applying for a personal loan. It is important to keep the following factors in mind for applying for a personal loan.

Rate of Interest and other applicable charges:

The rate of interest plays a major role in any type of credit. Even a one percent interest rate can make a significant difference in the total amount you repay. Check how much interest the lender is charging you and calculate the burden it is going to be on you. And, check out other applicable charges like processing fees and see if you can negotiate a few charges to be waived.

Loan amount and tenure:

Before inquiring about interest rates, first, calculate how much loan amount you need and how much you can repay in your best circumstances. Check out the tenure offered and see what works the best. Shorter tenures will give higher EMIs to pay and longer tenures will reduce the EMI burden but you will be paying more to the lender in the form of interest.

Income vs EMI:

Lenders look for an applicant’s creditworthiness as part of which they see if the applicant's cumulative credit does not exceed 40% of their disposable income. This is a common scenario in highly leveraged debts. This practice should not be necessarily limited to lenders. You need to do the calculations on your own. Analyze your expenditures, financial obligations, and cash flow before applying for a personal loan. Make sure you can afford the loan with your income without straining your finances.

Prepayment options:

A loan prepayment is a better way to bring down your payable interest. You may get access to extra funds after applying for a personal loan. By prepaying the total or partial loan amount using those funds, you can save a lot by avoiding applicable interest. See how the lender regulates prepayments. Most personal loans have a lock-in period. Only after this time frame can you prepay your loan amount with a feasible charge.

Credit Score:

A credit score is the gateway requirement that decides whether you are eligible for new credit or not. There are a few factors that affect your credit score. Namely, your repayment history, credit history, credit mix, credit utilization, negative status account, credit inquiries, and total accounts. You can go with services like mymoneykarma and get a soft inquiry without affecting your score. Learn where your score is and prepare your profile without giving any chance to the lender for rejection.

How can you get a cheaper personal loan?

There are five proven ways to get a cheaper personal loan. Check out any or all of these that apply to you.

Increase your credit score:

A good credit score not only increases the chances of loan approval but also reduces the applicable interest rate. If your score is above 750, say 800, then your loan interest rate is amazingly low compared to those who have a credit score of 700. Spend quality time before applying for a loan on improving your credit score. Though the score may not improve overnight, you might find improvements sooner than you know.

Shop Around:

Before agreeing to one lender, shop around and see what different lenders have in store to offer you. Pick the one that offers a better interest rate and has a smooth transaction record. Using services like mymoneykarma you can choose the right lender in the comfort of your home.

Personalized loan:

Instead of fixating on what’s advertised, you can get a loan that is customized based on your income, credit, and location. Mymoneykarma analyzes your profile carefully and brings up the best possible personalized solutions.

Get negotiated deals:

True financial experts can get you access to exclusive offers. Experts at mymoneykarma can show you offers that are not generally available in the open market. This includes amazingly reduced interest rates and zero processing fees.

Consolidate loans:

If you have too many credit lines, then it is wiser to consolidate your loans first before applying for a new personal loan. Figure out how you can pay off existing loans or use a debt consolidation loan to regulate all your credit lines.

Can you get a personal loan faster?

A personal loan generally takes up to 7 days or even a month if not approached right. Every personal loan application has to go through certain standard procedures such as eligibility checks, credit score checks, documentation, verification, approval, and disbursement. The whole process can vary from lender to lender as every lender has its time frame to work with. Even after approval, loan disbursement might take a couple of days more.

You can make this process painless and faster. You need financial expertise that can take care of everything for you, from checking the eligibility to making sure if the disbursement is done correctly. Executives from mymoneykarma do the whole process for you. You just have to fill in the application and upload the documents on the website. Your loan application will be approved in an hour and your disbursal follows within 24 hours.

How to manage a personal loan after you get it

Getting your loan approved is one thing. Managing that loan is a whole different ball game. Follow these simple rules to manage personal loans like a pro.

Keep up with payments

Your repayment history plays a major role in your credit report. The better your payment history is, the higher your credit score goes. So, first and foremost prepare a budget. Without a proper budget, your payments will not be uniform and your expenses will cloud your EMIs. Calculate your expenses and monthly payments and keep track of your EMIs. Preparing a budget helps you repay your loan without any defaults. And, try to make extra payments towards your loan. This not only lets you be debt-free sooner but also helps in avoiding paying more as interest.

Stay on top of interest rates

Always keep an eye on the market and see if any lender is offering a better interest rate for your profile. This helps before applying for a loan and also to transfer your loan from one lender to another.

Figure out loan consolidation options

You can transfer your loan from one lender to another and decrease the overall burden of the debt. This viable option works fine if your personal loan has become an unbearable burden on you. Bear in mind that balance transfer entails a few charges in this process such as foreclosure, processing fees, and stamp duty on the loan agreement.

keep an eye on your credit score

You need to make sure that the loan you take not only helps you with your current financial obligation but paves way for your future credit as well. Check your credit score for free and without any negative impact on your score thr0ugh mymoneykarma and see how your score is improving by managing your loan and if there are any areas you need to focus hard.

We hope this article helped you in understanding what a personal loan is, how to attain one without hurdles and how to manage one. Use the right resources like mymoneykarma and keep your finances stronger than ever.

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