2020 has shown and introduced us to a lot of new things, and one among them is the widespread popularity of personal loans. While the concept is not entirely new in India, and it has co-existed along with traditional loans for quite some time now, recently it has been gaining popularity mainly due to its differentiating factors.
One of the reasons as to why more and more people are becoming aware of personal loans is because of the widespread pandemic and its subsequent effect of pushing a lot of people into financial crisis.
If you too have been considering taking a personal loan for some time now, then this article is for you, as we will discuss the most frequent reasons as to why people opt for personal loans and a couple of important pointers you need to keep in mind, if you are thinking of applying for one.
What Is a Personal Loan?
One of the first and most important aspects we should discuss before we understand the intricacies of personal loans is the meaning of one. In simple terms, a personal loan can be understood as a financing instrument through which you can borrow a certain sum of money, usually between the range of ₹10,000 to ₹500,000 and repay it while enjoying a flexible repayment tenure, low rates of interest and instant disbursement.
Now that you know what a personal loan exactly is, let us look at some of the most prominent reasons why people go for one.
One of the first and most important reasons as to why most people take out personal loans is to undertake a process known as debt consolidation. To understand this better, let us take the help of an example. Suppose you have multiple loan accounts such as your credit card, car loan, EMI payments etc., and thus you are required to pay multiple EMIs every month.
Now, while this process might look simple at first glance, it is actually pretty difficult to manage, given that it is very difficult to regularly keep track of all accounts and make their payments on time.
Thus, often borrowers choose to take out a personal loan where they use the loan amount to clear off all their EMIs at once and then pay only one EMI per month. This process not only makes it easier for the borrower to track their money but also, in some cases, helps in saving money if the borrower makes smart decisions.
This process is known as debt consolidation.
Having our own home and keeping it looking new and polished all the time is a dream for many of us, but unfortunately, the high costs of home renovation often discourage us from participating in it, and thus this is the second reason as to why most people take out personal loans.
One of the most important factors to note here is that most traditional loans in India arrive with unnaturally high rates of interest (starting at 5%), while on the other hand, personal loans from lenders like MoneyView start at 1.13%, which is the lowest in the market.
Along with this, thanks to the instant disbursement process and flexible repayment tenures, most people prefer to take out a personal loan and use the amount to renovate their homes.
Unplanned Expenses
As the famous saying goes, life is full of unexpected surprises and such is the case with sudden expenses. Whether we agree with it or not, a lot of us are not well equipped enough to save for the future or a rainy day, and thus when disaster strikes, oftentimes, we do not have the amount we need to cover ourselves.
For example, let’s say that tomorrow there is a medical emergency, and either you or our loved ones need to be admitted to a hospital for their recovery, and as you might be well aware, healthcare is pretty expensive.
In such cases, when we do not have enough savings, taking out a personal loan can be really helpful as it will not only enable us to address our immediate financial commitments but also pay it back without burning a hole in our pockets.
Believe it or not, most borrowers in India resort to a personal loan when they face a sudden medical emergency.
What to Consider Before Taking Out a Personal Loan?
Now that you know the most common reasons as to why people take personal loans, let us take into consideration a couple of factors you need to keep in mind while applying for a personal loan.
Have a Good Credit Score
Whenever you approach a lender for a personal loan, one of the first factors they consider to assess your application is your credit score. In simple terms, your credit score is a numerical value assigned to you, based on your past credit history as assessed by a credit rating agency. In India, both CIBIL and Experian take into account four main factors when calculating your credit score and they are:
- The total number of loans you have taken in the past
- The total amount of credit you have accessed in the past
- The number of timely payments you have made
- The number of timely payments you have missed
Depending on how you perform on each of these factors, the lender gives you a score out of 900 and generally, if you want your application to get approved quickly, you need to have a score of 750 or above.
Do Not Apply With Multiple Lenders
A common mistake committed by most first time borrowers is applying with multiple lenders for a personal loan when they are in urgent need of one. While this move might look insignificant at first glance, it comes with far-fetching consequences. Let us better understand this with an illustration.
Let’s assume that you need a personal loan of ₹50,000, and you apply with lender A. Upon receiving your application, the lender will access your credit history either from CIBIL or Experian to assess your application, and this request by the lender is categorized as a hard inquiry.
Every time there is a hard inquiry on your credit report, the credit rating agency will decrease your overall credit score by a few points.
Now let’s assume that at the same time, you apply with lender B, who follows the same procedure, thus leading to another hard inquiry on your credit report in the same time period.
If you repeat this process enough times in a short time frame, what will end up happening is pretty disastrous.
Your credit score will go down significantly, and in the end, you will not be approved for a personal loan by any of the lenders.
Thus when you need a personal loan, only apply with one lender at a time and not multiple.
Ending Lines
Personal loans in India are now one of the easiest to avail of, thanks to the many companies who now specialize in this. Thus go ahead and choose a lender of your choice, to get the personal loan you deserve.
