Personal Loans are one of the most popular loans in the banking industry. It is because these loans have the most simple eligibility criteria. All you need are the following:
- A regular source of income
- An excellent credit score, the higher,the better
It is also the loan having one of the fastest turnaround times in the business. The principal characteristics of a Personal Loan are as follows:
- Easy to get
- Simplest eligibility norms
- Fastest turnaround time
- Simple documentation
- No need to provide collateral
- No obligation to disclose end use of funds
However, the Personal Loans have a couple of drawbacks:
- The Personal Loan Interest Rates are higher than secured loans.
- Borrowers with credit scores less than 700 find it a challenging task to get a Personal Loan.
Let us see the various aspects that go into assessing the Personal Loan repayment capacity.
The assessment of your repayment capacity
Usually, Personal Loans are unsecured loans. There is a high element of risk attached to it. Hence, banks are cautious while processing Personal Loans. It explains why they have kept the eligibility criteria of maintaining an excellent credit score. Banks stipulate a minimum take-home pay of around 50% or more while processing these loans. Therefore assessing your repayment capacity is essential before you apply for a Personal Loan.
The Fixed Obligations to Income Ratio (FOIR) concept comes to the fore when you sit down to assess your PersonalLoan repayment capacity. A high FOIR reduces your chances of getting a Personal Loan.
- Determine your eligibility level. Different banks have different eligibility criteria. It can go up to 20 times your monthly income subject to the satisfaction of take-home pay norms.
- Judge your requirement.
- List out your present loan obligations.
- Find out the interest rates of banks and select the one most suitable for you.
- Check out the EMI Calculator and enter the necessary data to determine your Equated Monthly Instalment (EMI).
Add the EMI amount to your fixed obligations. Now, calculate the FOIR. If the FOIR exceeds 50%, the chances of getting a Personal Loan decrease. Consequently, you have to alter your EMI by either reducing your loan amount or by extending your loan tenure. Note that you cannot go beyond 60 months. Therefore, you have to end up cutting your loan amount. Alternatively, you can close some of the existing loans and reduce your fixed obligations.
Why is the assessment of your repayment capacity important?
You need money to run your household and meet domestic emergency expenses. You cannot use your entire salary to repay your loan instalments. The banks are aware of this fact. Hence, they stipulate the condition that you must have a take-home pay of at least 50% after catering to the prospective Personal Loan repayment.
Repaying your loans on time should be your endeavour. If you do so, you manage to keep your credit score at high levels. Otherwise, it does not take long for the ratings to slide down rapidly. Once your credit score starts deteriorating, it becomes difficult to bring it back on track. You lose valuable time in the process. In the meanwhile, it becomes difficult for you to get new Personal Loans and Credit Cards. Even if you manage to do so, you end up getting these loans at high-interest rates.
Your Personal Loan amount depends on your repayment capacity
If you have high disposable income, it becomes easy for the banks to determine your eligibility. Otherwise, it becomes a challenge. The banks start stipulating terms and conditions that could require you to close some of the existing loans before you become eligible for a Personal Loan. Alternatively, you have to either reduce your requirement or wait for your disposable income position to improve.
What are the alternatives available if your repayment capacity does not match up to your requirement?
You can go for a secured Personal Loan. It could be a loan against your FD, NSC, LIC policies, gold ornaments, or even property. These loans require you to provide adequate collateral. Therefore, the risk perception of such secured Personal Loans is lower than the unsecured Personal Loans. It entails that the banks charge less interest as compared to the unsecured Personal Loan. A lower rate of interest results in a lower repayment amount. It could now fit into your scheme of things. However, you should note that failure to repay your secured Personal Loans can result in the banks disposing of the security and realising their dues. Thus, it becomes essential to maintain an excellent repayment record.
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