Personal loans have emerged as one of the fastest growing segments for banks. With abundant liquidity, banks are chasing customers with attractive offers on these loans. Banks provide personal loans based on the salary of individuals. The annual income based on income tax returns is the basic eligibility criteria for such loans for self-employed individuals.
Debit and credit card usage pattern determines the quantum of the loan for self-employed individuals while monthly salary income decides the size for salaried persons. Though the rate of interest varies from a decent 12% to a hefty 21% depending on the eligibility, credit score and tenure, customers have to watch out for the size of the loan.
Also Read: Effective steps to repay your personal loan
You may be eligible for 1.5-2 times your annual salary but be wise and cautious with personal loans. Do remember that they are unsecured loans that carry a higher interest rate than home and vehicle loans. Taking a loan amount that is more than your annual salary will be a drag on your finances. The bank typically decides on disbursing such loans to customers based on their earnings and spending capacity.
In case of salaried individuals, the payslip of the latest three months is taken as income proof for disbursing loans. For the self-employed, the amount of money they spent on debit and credit cards over a timeframe of six months to a year is used as the yardstick. Interestingly, a fat paycheck alone doesn’t determine your eligibility for personal loans.
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Leading banks have a strict policy of declining personal loans to those who are not employed in leading companies. Some banks offer personal loans only for employees of companies that are listed on the bourses.
Here is a primer on the do’s and don’ts one needs to follow while availing personal loans.
What is the ideal size of a personal loan?
Though there is no one-size-fits-all solution, one should ensure that the EMI (equated monthly instalments) on personal loans does not exceed 20% of monthly income, say financial advisors. If a lot of money goes into paying EMI for personal loans, enough funds will not be available to meet regular costs such as education and for other monthly recurring expenditure.
“The size of the personal loan should ideally be small. Further, a person should go for a personal loan only if she/he has exhausted all other options for raising money,” says Suresh Sadagopan, managing director and founder, Ladder7 Wealth Managers, a Mumbai-based wealth management firm.
What is the ideal tenure?
Individuals should keep the tenure of personal loans as short as possible. The duration of a personal loan may vary depending on the individual’s financial requirements and repaying capacity. Ideally, the tenure of such loans should not be more than 12 months. “If you can close your personal loan in one year it will be fantastic,” Suresh says.
“Personal loans should be as short-term as possible,” says Rupesh Nagda, founder and CEO, Family First Capital Advisors, a Mumbai-based investment boutique specialising in family office, portfolio and wealth management services.
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When can one avail a personal loan?
Personal loans should be taken only when an individual faces unforeseen circumstances. An unexpected medical emergency or a sudden financial crunch in the family at a time when one is not able to raise money through physical assets such as gold are good enough reasons for availing a personal loan. But such loans should not be taken to fund extravagant expenses such as vacations, say financial planners.
“Don’t avail personal loans until you desperately need that. It’s a debt trap. Please avoid taking personal loans for buying gadgets and luxury goods. They are depreciating assets,” Nagda says. “Personal loans are quite expensive compared to others such as home and gold loans. You can take it if there is a medical emergency or you have a sudden financial requirement in the family,” say financial advisors.
Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.
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Published: 09 Jun 2024, 11:35 AM IST
