Mortgage An Asset In Order To Obtain A Personal Loan?

The need to shore up resources at a short notice can spring up for a variety of reasons. This can be to purchase a high-value product, cover for emergency hospital expenses, family wedding, foreign vacation, and balancing cash outgo and inflow due to a sudden mismatch for a short term where the regular income is not enough.

In an ideal scenario one should have kept some savings for meeting such short-term extra expenses. However, in reality, this may not be always possible, especially for people who have just entered the job market. In such a case, one has the option to avail a personal loan.

Personal Loan

This is a simple loan product that one can avail quickly from a bank or a non-banking finance corporation (NBFC). While different lenders have different requirements, here are some basic notes on eligibility, documentation and process for availing a personal loan.

To be eligible for a personal loan a borrower should:

• Be in the 23-65 years age bracket
• Be a salaried employee or a self-employed individual
• Have a monthly income of Rs 22,000 and above, depending on the city of residence
• Have a CIBIL score of 750 and above, though many lenders do advance a loan to those with a lower score with a higher interest rate

Documents Needed

• Basic KYC papers for identity and address proof such as government-issued documents like a Aadhar Card, Driving License, Passport etc.
• Three months of bank statements for income proof.
• Debit card or net banking details for setting up e-mandate for repayment via EMIs.
• e-Sign or e-Stamp for quick personal loan disbursal.

Process and Benefits

To apply for a personal loan, one has to simply fill in their details online, submit documents, choose the personal loan amount and hit go.

The approval process is fairly swift for a personal loan, especially if the documents are in order and one has high creditworthiness or high CIBIL score.

Indeed, the CIBIL score is the key to availing a personal loan. This is a three-digit number that captures one’s credit history. It covers aspects like past and current outstanding loans, repayment track record, credit utilisation ratio and loan queries.

If one has multiple loan accounts and outstanding loans, it decreases one’s ability to pay back compared to the income so it is taken as a negative point for the CIBIL score. Most importantly, if one has defaulted on some loan by missing or skipping an equated monthly installment (EMI) it raises a red flag in the credit report and affects the CIBIL score.

Notably, the score is also affected by one’s credit card usage even if one has not availed a loan in the past. This is because credit card also offers an instant credit to a user with up to one-month free credit period only beyond which a fee or interest is charged.

Also, if one has been making lot of loan queries, each time one applies for a loan it is recorded and even if one has been applying to multiple lenders it is indicative of a credit-hungry person and decreases the score.

All said and done, while a good CIBIL score ensures a quick sanction and disbursal of a personal loan at a low interest rate, the lower score does not disqualify one from availing a personal loan.

The biggest benefit of a personal loan is that it is free of any collateral. This means one doesn’t have to pledge or mortgage any asset for availing it. This makes it a worry-free form of a personal loan compared to a gold loan which is also meant for meeting short term cash needs. However, one should make sure they do pay back the dues on time and do not miss any EMIs as that affects the CIBIL score for the future.

At the same time, the collateral-free nature of the loan means a personal loan is the swiftest way to borrow. In the case of other secured loan products such as gold loan or others, the lenders need to assess the value and or ownership of the asset to get an approval. This takes some time. However, for personal loan without any collateral the process is almost instantaneous.

Conclusion

A personal loan is the most common form of borrowing to meet short-term cash needs. As against other forms of borrowings, a personal loan does not require one to mortgage any asset. While this comes at a marginally higher cost with higher interest rate, it makes one free from the possibility of losing possession of some asset as there is no mortgage involved.

IIFL Finance offers personal loan from Rs 5,000 to Rs 5 lakh for a period of up to 42 months at an interest rate starting as low as 11.75% per annum.