Personal loan is an unsecured loan taken by individuals from a bank or non-banking financial company (NBFC) to meet their personal needs. A person’s credit history plays a major role in getting a personal loan as it is unsecured. A personal loan can be taken for any purpose including debt consolidation, an unexpected medical bill, buying a new appliance, a vacation or even a student loan.
Personal loans can be a viable option in a variety of circumstances. Some loans are earmarked for a specific purchase. You buy a home with a mortgage loan, you purchase a car with an auto loan, and you pay for college with a student loan. But a personal loan can be used for just about anything. Some lenders want to know what you will do with the money they lend you, but as long as you have borrowed it for a responsible and legal reason, you can do what you want with it.
A personal Loan provides an easy access to money when one needs it the most. Personal loans are generally disbursed faster than most other types of loans, sometimes with 48 hours or even on the same day, if one satisfies the eligibility conditions. Here are some situations when a personal loan comes in handy:
- Debt Consolidation
- Contingencies
- Hospitalization
- Dream Vacation
- Grand Wedding
- Home Improvement
- Festival Celebration etc.
Personal loan is a great help to clear long outstanding dues. One can rid themselves of old liabilities and restart with fresh terms. Doing so improves credit payment history, which improves your credit score.
A personal loan does not offer any tax deduction or exemption benefit under the IT Act, 1961. However, if one buys assets such as gold and jewellery, and shares, one can benefit from the exempted tax on the personal loan. Interest paid on the same is considered as the cost of asset acquisition. Thus, it reduces the total capital gains and provides tax benefits.
Documents required for availing a personal loan:
For Salaried Person
- Identity Proof : Pan Card, Passport, Aadhar Card, Driving License, Voter ID
- Address Proof: Passport, Aadhar Card, and Driving License, Utility Bill (Telephone, Electricity, Water, and Gas) not more than 2 months old. If permanent address is different from communication address, address proof is required for both addresses.
- Income Proof :Latest 3 months’ salary slips, latest 6-month bank statement, Form-16, latest 2-year ITRs
- Proof of Employment: Appointment letter issued by the current employer and the relieving letter issued by the previous employer.
- Photograph :Latest colour photograph
For Self Employed
- Identity Proof: Pan Card, Passport, Aadhar Card, Driving License, Voter ID
- Address Proof: Passport, Aadhar Card, and Driving License, Utility Bill (Telephone, Electricity, Water, and Gas) not more than 2 months old. If permanent address is different from communication address, address proof is required for both addresses.
- Proof of office address: Electricity bill, Property documents, Maintenance bill
- Proof of Business: GST registration certificate, Company registration license, Shop establishment proof
- Income Proof: Latest 2-year ITRs with computation of income duly attested by CA, Audited balance sheet, Profit & Loss accounts, tax audit report
- Bank Statement: Latest 1-year Savings/Current account bank statement
- Degree Certificate: In case of professionals
- Photograph: Latest colour photograph
General Credit Score Range
Range Grade
0 or -1 No Credit History
500 – 300 Bad
551 – 649 Poor
650 – 699 Fair
700 – 749 Good
750 and above Excellent
Credit score is measured against a total of 900. It is calculated based five key factors.
- Credit history
- Length of credit period
- Total debt owned
- Type of loans taken
- New debt
One is advised not to apply for multiple loans: Appearing credit hungry person to a lender only drives him away. Besides, an enquiry made on the credit report every time one applies for a loan. Too many inquiries by financial institutions is considered bad for a borrower.
Points to remember for improving credit score.
- Do not apply for multiple loans
- Decide the amount carefully
- Make regular payments
- Do not pre-pay your loan
- Do not rush to other debts
- Do not close your loan prematurely
Everything aside, a well maintained personal loan history can improve credit rating. One con consider taking a personal loan to consolidate credit card debt and other high interest debt that can be easy on the pocket.