PERSONAL LOANS APPLICATION PROCESS

FOLLOW THESE THREE SIMPLE STEPS

WHAT ARE PERSONAL LOANS?

Personal loans are consumer or all-purpose loans. They are used by people to meet their needs such paying for home renovations, vacations, unexpected medical bills, weddings, recurring bills, educational expenses, purchasing home appliances or electronic gadgets and any other emergencies.

They are designed exclusively for people who don’t want to go through the hassles of providing a collateral in order to obtain a loan. Also, when it comes to fixing your car, making a down payment of your new house, investing in a business, etc., personal loans are very useful. Personal loans are unsecured and only helps you meet your current financial needs. You are not obliged to pledge any collateral or security when you want to take personal loans and you are not restricted to the use of the funds.

You can use the funds for any need. It is a life saving solution for all your expenses. As compared to credit card loans, personal loans are more difficult to get. They sometimes come with strict requirements for qualification and unique rules. The criteria involved in personal loan includes employment history, level of income, repayment capacity , and credit score.

Why You Should Take Personal Loan.

Personal loans are used for diverse purposes; debt consolidation, vacations, purchasing cars, renovations, weddings, etc. People also use the proceeds of personal loans to pay off debts on their credit cards. You can also use personal loans to payoff student loans.

Interest rates on student loans are very high so paying off such loans personal loans saves you some cash. Note that tax advantages on federally recognized student loans are different from those on personal loans. In order not to get dinged at tax time, check with a tax professional before you take the shot.

Forms of Personal Loans

There are two forms of personal loans; Secured and Unsecured.

Secured personal loans require a form of collateral such as a credit card or savings account. In a secured personal loan, the lender has the right to claim your asset as refund for the loan if you are unable to make payments. The interest rates on secured personal loans are much lower because of the security measures on the loan.

Unsecured personal loans do not involve any form of collateral. It is up to the lender to decide whether you qualify for the loan or not based on your financial history, but that will mean the borrower will pay a high interest rate on the loan. Some lenders will offer other secured options if you want a lower interest rate or don’t qualify for the loan. Unsecured personal loan can also be called a signature loan. This is because the borrower’s signature is used as a guarantee to the loan.

There are no restrictions involved in any of these personal loans. The choice to have any of these loan forms is soley at the borrower’s discretion or convenience.

The loan terms in Personal loans are fixed and repayments are made on monthly basis. It is required of the borrower to pay a specific amount every month for the repayment of the loan, and the interest rate on the loans does not change. This births a stable monthly budget for the borrower and aids people in financial distress to redeem themselves successfully.

Where You Can Get Personal Loans

The first place that pops up in your mind when the need to acquire a loan rises is the bank. But there are other lenders out there who offer personal loans to qualified applicants. They include consumer finance companies, peer-to-peer lenders, Credit unions and online lenders. Though some credit unions and banks offer good rates, some online lenders offer better terms especially to people with good credits. Online lenders also pardon those with poor credit than the banks and credit unions.

Below is a list of some reputable and popular lenders as at 2018:

• LendingClub: LendingClub is not a bank. Rather it is a peer-to-peer lender who offer personal loans of $1,000 to $40,000 with flexible terms. Application for loans from such lender is done online.

• LightStream: To qualify for a loan with this lender, you need a good credit. LightStream doesn’t charge start-up fee and the interest rates on their loans are reasonable. It also restricts you from borrowing to payoff student loans.

• Avant: application for the loan is done online and it allows you to borrow up to $35,000. Approval of the loan takes a few minutes prior to the application and within 24 hours, your loan can be funded. The rates vary from 9.95 to 35.99%, and this depends on your credit history and the loan terms.

• Upgrade: loans offered by Upgrade are fund within 24 hours and loans offered are up to $50,000.

• LendingPoint: it offers loans based on merit (current debt and employment history) and approves loans to those with fair to good credit scores.

Eligibility Criteria for A Loan

The criteria involved varies from lender to lender and bank to bank. However, there is a general criterion which includes your income, age, ability to repay the loan, occupation and your place of residence.

To get personal loans, you are required to have a consistent income source, even if you are self-employed, a professional or a paid worker. The borrower’s eligibility can also be affected by the credit history, type and place of work. Other eligibility criteria include:

• A minimum age of 21 years
• A maximum age of 60 years and at loan maturity
• A minimum monthly net income of Rs. 15,000

Loan Duration

Personal loan duration is usually from 6 to 12 months or 1 to 5 years. The lender can allow a longer or shorter tenure on a case by case basis, but it is not usual.

Disbursement of Loan Amount.

Ideally, amount on the loan takes within seven (7) working days of the loan application to be disbursed to the lender. When the loan is approved, the money will be deposited automatically into the borrower’s savings account or he will receive an account payee draft/cheque that is equal to the amount on loan.

How Can an Individual Take Personal Loans. And How Much Can He/ She Take?

Taking personal loans solely depends on your income and is based on if you are self-employed, or a salary paid worker. It is very usual of banks to restrict fee on the loan such that the equated monthly installment (EMI) of your monthly income is either 40-50% or less.

When calculating the personal loan amount, the lender takes into consideration any existing loans that are being serviced by the applicant. The loan value of the self employed is determined on the profit earned as per the most recent recognized profit/Loss statement, taking into consideration any liabilities he might have.

The minimum principal the personal loan lender can give is Rs 30,000 but it varies per the institution.

How Banks Decide on The Maximum Loan Amount.

Though the criteria for authorizing a loan differ from bank to bank and lender to lender, other factors such as bad credit score, liabilities and current level of income may influence the decision of the lender to authorize a particular loan amount. When you have a good credit score, say 850, it tells the lender you have paid off previous loan debts or dues on your credit card appropriately. The lender will then perceive you to be a good borrower and issue high amounts to you.

On the other hand, when you have not paid off previous loans, dues on your credit card and current EMIs, it will have a negative effect on your capacity to repay. If your current level of income is low, and you have lots of liabilities, your chances of being authorized with a high amount of personal loan will be lower as compared to those with a few financial liabilities and higher income.

How To Choose A Loan Provider.

The tendency of a borrower to pay more interest on a loan is high if he/she chooses low equated monthly installments (EMIs). This is so because the factors behind low EMIs offers results from longer repayment terms, low interest rate or both. You should therefore use the EMI calculator calculate your interest charge on the loan term and also your capacity to repay the loan before taking the shot.

Personal Loan Charges

Processing Fees – processing fees lenders charge on personal loans range from 0% to 4%.

Insurance –insurance protects the borrower from any risk associated with the loan when he/she is unable to work due to ill health, loss of job, death or injury. And this is dependent on the type of insurance taken.

Prepayment charges – depending on the bank or lender you chose, you might be charged for prepayment on the loan you are taking.

Interest Rates and Extra Charges on Loans

Personal secured loans have lower interest rates than unsecured loans. Non-Banking Financial Companies (NBFCs) and banks offer loans at low interests of 11.49%, considering your level of income, loan amount, credit score, tenure, and past relationships with lenders on your credit cards, savings account and loans. In the loan application process, lenders charge an amount that is not refundable together with the interest principal interest. This amount is the charge on the processing fees. It is generally 1-2% of the principal and the processing fees of the paperwork. If you have good relationship with the moneylender, he/she might ignore the charge.

There are two types of interest rates on Personal loans. It can either be fixed or floating. Your interest rate is said to be floating when the EMIs continue to decrease, following the balance reduction procedure when calculating the interest disbursement on the loan. On the other hand, the EMIs on a fixed rate personal loan remains fixed. Floating rates changes on either annual basis or half a year based on the rules of the new Marginal Cost of Funds based Lending Rate (MCLR).

Difference Between Flat Rate of Interest and Reducing Rate.

With flat rate of interest, the borrower pays the full interest of the outstanding balance on the loan during the period. This implies that the interest to be paid neither increases nor decreases as the borrower pays the EMI on the loan periodically. Reducing interest rate on the other hand allows the borrower pay a rate on the outstanding balance on the loan alone.

Early Repayment of A Loan

Some banks allow prepayments on a loan only when the borrowers have made a number of repayments. Other lenders don’t allow part prepayments, and charges on prepayment may be put on the outstanding loan amount.

Applying for Personal Loan

Personal loan application takes a few minutes. The lender grants the loan after confirming the borrower’s source of income. When the lender realizes your credit is bad, he/she may give you a short period of time to pay back the loan and your annual percentage rate will be high. Irrespective of this, lenders ensure that their borrowers are well catered for, so they can meet their payment deadlines. A lender may also extend the deadline to make the repayment easier and more flexible.

The borrower must read all the information provided and ask any question for clarification when he/she is filling the application form for the personal loan. This will enlighten the borrower on all aspects of the loan to take. The funds of the loan are paid directly into the borrower’s bank account once it is approved. Alternatively, you can get a check through a postal service.

When the borrower pays back the loan on time, the lender updates the credit bureau and in the long run, change and increase your score.
Note that the terms and conditions applied in any personal loan varies from one lender to the other and therefore the borrower will have to do a swift comparisms in order to make a good choice. Lenders also don’t deny borrowers this opportunity.

As a borrower, you should only borrow an amount you can afford to pay back. In choosing a lender, compare the rates so you can get the best and try to borrow less amounts or allow your score to improve over a period if the interest rates offered on the loan is high. Also calculate the monthly payments on the loan to ensure you include it in the budget.

DOCUMENTS REQUIRED WHEN APPLYING FOR A LOAN / SOME CONSIDERATIONS BEFORE CHOOSING PERSONAL LOANS

Select the Lowest Offer

The interest rates on personal loans varies based on the lender. To apply for a such loans, compare the rates other lenders are offering so you don’t end up with one with sky rocketing interest rate.

The documents required by financial institutions may differ in one way or the other depending on the institution but there are some documents a borrower will have to provide for the loan application process. They include:

• Proof of income
• documents of proof of Identity
• Certified copies of licence/ degree (for individuals who are self-employed)
• documents on proof of Address
• Income proof (salary slip for salaried/recent acknowledged income tax return for the self-employed)
• Photograph
• Proof of age

Foreclosure or Prepayment Charges

Prepayment/foreclosure charge is an additional fee or penalty a borrower is charged if he/she decides to make complete payments of the loan before its tenure ends. The charge ranges between 1 and 2% of the outstanding principal, however other banks charge more to foreclose a loan.

If for any reasons the borrower thinks he/she might be able to refund the money earlier than the due date, he/she should find out if there are any penalties involved before choosing the loan provider. A clear understanding of this will enable you know what to expect from the lender when paying back the loan.

Know the Processing Fee

Fees lenders charge on the loan application process varies so it is the borrower’s responsibility to find out the charge the lender is offering on the loan you are taking.

Know Your Equated EMI and Tenure

Your EMI is the payment you make to a lender on specified days of each month until you finish paying your loan in full. When the EMI on your loan is low, your payback tenure will be longer and vice versa. It will look like a good and easy option but may be expensive in the long-run.

The best way out of it is to calculate the total cost on your loan and choose a higher EMI you can payback in a shorter tenure.

Keep Track of Your Credit History

Your credit report determines whether you can get the loan fee and if you can payback the loan you are requesting for on time. It is therefore advisable to keep track of credit score history and improve the credit score. If you have a good record on repayment of your loans, lenders will be excited to work with you. They also will offer you a better and more attractive interest rates.

Reimbursing the Loan

To repay personal loan, you can issue a directive to allow payments through the Electronic Clearing Services system or repay in a form of EMIs through post-dated cheques drawn in favour of the bank.

Consequences of Defaulting on A Scheduled EMIs

As a borrower, you are to repay your loan on time, but when you find yourself missing a scheduled EMIs and fail to pay in the future, the money lender will first try to recuperate the principal amount through recovery and settlement agents Your account will then be defaulted if the attempt fails. This will negatively affect your credit because your loan will show a default on your credit report making it difficult to get a credit card and loan approvals in future.

Tax Benefits

Personal loans do not have tax benefits, yet if you take one for down payment/ renovations, you could be entitled to I-T deductions. This is stated in Section 24. This benefit is not limited to the principal amount and but the interest. You will have to provide the original receipts to the documents in order to claim the deductions.

Offer on Balance Transfer

The lender depending on the outstanding situation will allow the borrower transfer the balance to be paid on the loan another lender. The present lender pays the loan balance to the previous lender so by the close of the transfer process, the borrower owes only the present lender the principal and interests left on the loan. Balance transfer offeres a low interest rates and this is a major benefit to the borrower. There are however few charges including prepayment charges and fee on the balance transfer in the process.

Why Your Initial EMIs Do Not Have Much Impact On the Due Principal Amount.

I will like to use this opportunity to introduce you to “frontloading”. Frontloading is a process whereby part of your EMIs is used to reimburse the interest due on your loan. Initially, a little amount of your principal amount is paid and as you further progress, the little reductions the principal adds up. This leads to a decline on the interest you are to pay on the total amount. The principal on the loan is paid off by the greater part of your EMI in the years ahead.

Similarities and Differences Between Credit Cards and Personal Loans

Credit card loans are acquired on the borrower’s card. Unlike personal loans where you can approach any lender, credit card loans are applicable to specific cards. Only your card issuer can grant you a loan on it and the borrower does not require any additional documentation like that of the personal loan application to get the loan. Credit card users are provided with enough money to withdraw and payback repeatedly with the condition that the borrower does not exceed his/her credit card limit.

Credit building

Personal loans and credit cards play a good role in building your score. Though they help to expand your credit report, you have to be cautious in handling your credit, so it does not affect the score.

Repayment

With personal installment loans, the borrowers have an idea of when they will be free of debt if they are meeting the payment requirements. Credit card debit on the other hand remains for a long time due to its revolving nature. The offer gives you more opportunities to borrow once you are meeting your monthly requirements. Until you opt out on the use of the card, you are not entirely free of debt.

Timely spending tool

Credit cards are used mainly for purchasing from merchants. Personal loans may not be taken necessarily for daily payments but for other kinds of expenses that require lump sum amounts. Both credit cards and personal loans are timely spending tools in the hand of the individual.

High-Interest rates

Credit cards have the tendency to charge its users extremely high interest rates. Even if you have enjoyed the promotional rates, they do end. You will be back to paying the original interest rates you bargained for. Credit cards will usually have variable interest rates whilst personal loans will provide fixed rates.

May not be ideal for cash – When it comes to cash, personal loans are considered better than credit cards. Credit cards can give you cash advances when you are cash strapped for money. The downside with this is that, it has higher interest rates than using your card for the usual purchases. You would only have to be cautious of the higher interest rate and upfront fees that you would be charged when its time to pay back.

Your Score and Credit Report

Generally, your credit history is very important when a lender is considering to give you the personal loan. Credit score is the numerical representation your overall borrowing practices over a period, usually in three – digits. Lenders use it to determine whether you are eligible for the loan or not and it ranges between 300-900. When you have a bad credit score, it is less likely your lender will approve your loan.

On the other hand, when you have a high credit score, it tells the lender you are responsible and have paid all past debts, hence qualify for a loan. Though there is no law that prevents a borrower with a bad credit from taking any personal loan, the likelihood that you might get the type of loan or the exact amount you need is low.

Personal Loans and Bad Credit

There are personal loans options suitable for people with bad credit scores due to bankruptcies, late or no payments, foreclosures and defaults. This loan options gives the borrower the opportunity to work and improve their credit score. Money lenders warmly welcome people with bad credit scores who need personal loans. They know of the possible financial fallouts that can occur and lower the credit score of an individual.

Possible causes of bad credit score are loss of jobs, identity theft and delays in pay checks due to new job acquisition. Lenders however assess the borrower’s (with bad credit) source of income from social security, alimony, disability or other financial settlements to determine the amount he/she can approve to the borrower. Lenders do this to be certain that the income of the borrower will be enough to repay the loan in due time.

Benefits of Having a High Credit Score

When you have good credit, you have greater changes of getting a loan since it is an indication that your credit record is good. You can also negotiate the benefits on relinquishment of the processing charges, lesser interests, higher amount on the loan and many more by holding on to your good credit.

Facts to note about personal loans

Personal loans are usually unsecured

An asset/ collateral is not required to grant personal loans. Due to this, it is quite difficult for a lender to grant personal loan as compared to a business loan where a collateral is required. Personal loan lenders who give loans without any form of security will take other actions to recover the money the borrower owes. The lender might hire a collection agency, possibly file a lawsuit against you or report your late payments to the credit bureau in order to get their money back.

Personal loans have fixed repayment amounts

Personal loans offer borrowers a fixed monthly repayment plan. The loan offer also ranges from $1,000 to $10,000. The amount a lender will offer is based on the borrower’s income, credit score and debt. You can borrow more if your credit is good and your source of income is high. Banks on the other hand limit the amount a borrower can take even if he/she qualifies for more. When you pay off the amount you owe, the balance on your loan reduces but you cannot take more loans without reapplying like that of the credit card where you don’t have to reapply to get a loan.

Personal loans have fixed interest rates

Interest rates on personal loans don’t change but in very few cases, they may have variable rates making payments unstable as the rates change periodically. This may make budgeting to payback the loan quite difficult. The disadvantage of a variable interest rate is that as your rate changes, the payments on the loan can fluctuate. This can make it difficult to make a proper budget for the payment of the loan.

The Interest rates on your loan is dependent on the credit score so your rates become low when you have a good credit score. It is therefore ideal to opt for lower interest rates when applying for a loan so you can pay less. Some lenders, based on their discretion may offer government employees, few private limited company employees and lenders who have an account with lower interest rates.

Personal Loans Have Fixed Repayment Periods

Usually, a borrower has between 1-5 years to reimburse the personal loan. The longer the payback time is spread, the lower the amount the borrower has to pay every month. When you choose a shorter time to refund the loan, your loan will be paid back early, however, you will have to pay more interest rate. You can be given a lower interest rate provided you payback the loan over a shorter period. The probability that you will be approved for other credit cards or loans can be low if you have an open loan. Therefore, if you take out a loan for 5 years rather than 3 years, your chances of borrowing more for an additional 2 years will be small.

Other Charges

Many lenders charge origination fees ranging from 1 to 6% of the amount you are requesting for when setting up the loan. The fees lenders charge is based on the credit score. If you fail to pay back the loan on time, the lender charges you an amount for late fees.

Personal Loans Can Affect Credit Scores

Lenders report all information on your credit report and loan details to the credit bureaus. This implies that all information right from the loan application process to the time you pay back affect your credit report. It is therefore advisable to minimize the rate at which you make new enquiries when shopping around for the rates on personal loans. You can try to get preapproved or apply within a limited time period. Preapprovals don’t affect the credit score and they also don’t always pop-up as hard inquiries on your credit report. Your score can be negatively affected if your lender provides a negative information about your credit habit to the credit bureaus. To maintain a good credit score, the borrower must make the monthly payments on the loan on time and be consistent in paying back the balance on the loan.

Benefits of Personal Loan

• The processing time for Personal loan is usually short compared to other types of loans, making it one of the quickest loans you can get.
• Getting personal loan requires less documents
• It requires no collateral since it is unsecured
• Timely and consistent loan repayment builds the credit score
• Can be used for any purpose (Wedding, vacations etc.).

Disadvantages of Personal Loan

• Personal Loans generally have high interest rates because they are unsecured.
• Some banks and financial institutions only allow foreclosure/part payment after a certain duration, usually one year.
• The chances that a lender will grant you the loan you need is thin when your credit history is bad.

Alternatives to Personal Loans

Community assistance.

Non- profit organizations and other charities may be able to help out when you find yourself in financial need. You can also locate local groups in your area who can offer assistance in times of financial need.

Selling off some belongings.

Getting personal loans when your credit is bad can be stressful, however, selling some of your belongings is a way to raise the money you need to cover that emergency. Try and locate all items you don’t need (television, bags, laptops, play stations etc.) and put them up for sale. It might be difficult letting go some of these items but its better than being in debt as a result of borrowing.

Reducing your utility bills

You can ask your bill providers if there are any programs you can partake in to reduce the costs on your utility bills. They will work out a flexible payment plan with you so you can have free cash flow to pay for other needs. You can also make conscious efforts to reduce the rate at which you use your utilities when you are unable make ends meet or keep up with the payment of the bills. For example, you can reduce the power consumption on your washing machine by doing your laundry once in a week instead of twice. Energy or efficiency saving methods at home will help reduce your monthly bills.

Apart from the low interest rates on personal loans, lenders factor service taxes, processing fee, and other levies in the application process. Lenders provide only trusted people and with good credit scores with low interest rates since they are confident that they will repay the loan

Prerequisites for Obtaining Loans at Low Rates.

1. Maintain a good credit report- Make sure you have paid off all debts and credit card bills when seeking for personal loans with low rates.
2. Have a collateral– having a collateral to secure a loan is a good way of getting low interest on the loan. It serves as a form of accountability to the lender. The lender will therefore be willing to give you a low rate on the loan you are requesting for.
3. Have a full-time job- having a sustained full-time job and at least 2 years’ experience record will assure the lender that you have a good economic status. A stable source of income is a proof that you can pay back the loan on time.
4. Search the internet- it is best to search online for interest rates lenders are offering on loans. there are various websites available that display all information about the lenders. Searching online opens you to the rates lenders are offering and through that, you can get good rates for your loan.

Depending on the repayment period and low interest rates you select, you can make extra savings on your personal loan. To be at the safer side, select a longer repayment period since it comes with less monthly payments and will reduce any monthly financial burden on you. Choose a shorter credit term and make payments in instalments to reduce your loan term if you want low interest rates.

Borrowers who enjoy the best rates are those who go to lenders they have a good relationship with. This makes it important to establish a healthy relationship with your lender to enjoy the benefits of your loans.

Watch Out for Scams

Avoid lenders who guarantee approval without checking credit scores or asks you to provide some money through prepaid cards or wire transfer to secure the loan. Check with the Consumer Financial Protection or a better business bureau to be sure.

Conclusion

It is advisable to borrow amounts you can repay. Choose personal loans wisely and factor in your monthly payments, fixing it into your budget. Always compare different rates and lenders before making a decision. If you urgently need a loan but don’t have a good credit, it will be best to give your credit sometime to rebuild or reduce your borrowing.

You can sell your items you don’t need to raise the money rather than taking the loan as it will help grow your score. Choose loan plans with less charges which corresponds with your financial strength to avoid debts and improve your score. You should only take personal loans if you need to make some purchases or go on a vacation outside your budget.