Personal loans, also known as consumer loans, are multi-purpose loans that can be used to meet all of your immediate needs. As observed, all central banks and lenders look at the following requirements while reading through loan applications:
Credit history: One of the most significant aspects a lender considers when considering a loan application is an applicant's credit score. Credit scores range from 300 to 850 and are determined by payment history, unpaid debt, and how long the loan history is. Many lenders need a minimum credit score of about 600 to apply, but some lenders will lend to borrowers with no credit history at all.
Source of income: Borrowers are subject to income conditions by lenders to ensure that they will be able to repay a new loan. Lenders have different minimum income expectations. However, don't be surprised if your lender doesn't report minimum income standards. Many people do not. Recent tax returns, monthly bank statements, payslips, and signed letters from employers are acceptable forms of proof of income; self-employed applicants may provide tax returns or bank deposits.
Previous debts: The debt-to-income ratio (DTI) is a percentage that depicts the portion of a borrower's monthly income that goes into paying monthly debts. DTI is used by lenders to forecast a prospective borrower's ability to make payments on new and existing debt. As a result, a DTI of less than 36% is preferable, but some lenders will accept a highly qualified applicant with a ratio of up to 50%. For most banks, this is the most important criteria to assess personal loan eligibility .
Collateral: If you apply for a secured personal loan, your lender will ask you to pledge valuable assets, also known as collateral. For home or auto loans, the collateral is usually linked to the loan's purpose. Secured personal loans, on the other hand, may be collateralised by other valuable assets such as cash accounts, savings accounts, real estate, and collectables such as coins or precious metals. If you fall behind on your payments or default on your loan, the lender has the right to repossess the collateral to recover the unpaid loan balance. The HDFC Personal Loan, for example, has seen a rise in the number of default cases after the onset of the pandemic.
When it comes time to officially apply for a personal loan, the lender will ask for a variety of documentation to validate everything from your identity to your address and job. The following are the most common documents required by lenders as part of the personal loan application process:
Loan application: A loan application is a structured document that prospective borrowers must complete and submit in order for the lending process to begin. Since each lender has its own application, the basic conditions can differ.
Proof for identification: To show they are at least 18 years old, most lenders require applicants to have at least two types of government-issued identification. This measure also reduces the risk of identity theft.
Verification of income: As part of the application process, lenders usually require prospective borrowers to show their work background and current earnings.
Address proof: This could include presenting proof of address, such as a recent water bill, a copy of your lease or other rental agreement, a voter registration card, or proof of home, rental, or auto insurance that includes your address.
Conclusion:
The process of finding a personal loan might be intimidating, but with all the requirements in place, there is no reason for you to worry. You can easily access the benefits of a personal loan by ensuring that you have all the documents and a clean history. The time of a financial crisis may be daunting, and not finding a reliable lender will make it worse. Hence it is necessary to find the right lender or rely on a central bank.