A Personal Loan is a type of loan people can use for any purpose. The requisites for a Personal Loan are easier to fulfil than other loans, which is why many people choose it in the first place. While Personal Loans are usually collateral free loans, they can be availed after putting up some kind of asset as collateral in case a borrower is otherwise ineligible for an unsecured loan.
Personal Loans with Collateral
For Personal Loans with collateral, you are required to keep an asset of yours with the lending institution as security against the loan amount. This asset could be in the form of any of the following:
- Property Documents – This could include the documents of any property you own like a house or workshop.
- Fixed Deposit – You could put up your lump sum savings as collateral to receive a Personal Loan at a low-interest rate.
- Jewellery – Jewellery or gold jewellery in particular can be put up as collateral against a secured Personal Loan.
- Insurance policy – If there is enough cash value built up in your insurance policy, you may be able to use a percentage of the amount as collateral to avail of a Personal Loan.
- Fine Art/Antiques – Prized possessions like high-value fine art or rare antiques can be used as a security or collateral against a Personal Loan.
If the loan is not repaid, this asset acts as a security, At times, a guarantor can be nominated to honour the repayment guarantee.
While secured Personal Loans can help you receive necessary funding when required, you should always aim to improve your creditworthiness to be able to avail of a loan you desire without having to put up any collateral. This is where collateral-free loans can be of assistance.
What are Collateral-free Loans?
In the case of collateral-free loans, you do not have to keep any assets as security. The terms of collateral and collateral-free loans are a bit different. The type of loan a borrower might get also depends upon their credit score. There are other criteria as well, such as age, salary, tenure of professional life, monthly income, etc.
Eligibility Criteria for Collateral-free Loans
The purpose of these criteria is to ensure that the loan is repaid. Let’s take a look:
- Age – A person’s age plays a key role in a loan application. Being an adult is not enough; the applicant’s age should be more than 22 years. Similarly, the period should be less than 58 years at loan maturity. For example, if the loan is for ten years and the applicant is 50 years old, then the applicant does not match the age criteria. At loan maturity, the applicant will be 60 years of age.
- Work experience – Work experience of the applicant matters when applying for a loan. The eligibility is not met if the applicant has just started working. They should be able to pay the loan instalments, which is why work experience matters. The minimum work experience is typically around 1-2 years.
- Monthly Income – The applicant’s monthly income is a prime criterion for loan approval. The same may be rejected if the monthly payment is less than the loan amount. Suppose there are any pre-existing loans; then the EMI of all the loans is considered. EMI should not go above half of the monthly income. In other words, the debt-to-income ratio should be less than 0.5. For example, if the monthly salary is ₹20,000, and the applicant has an existing loan of ₹10,000, then the loan would be rejected. This is because half of the monthly income is already blocked for the previous loan instalment.
- Employment status – If an applicant happens to be unemployed, they will not qualify for a loan.
- Credit Score – Credit scores range between 300 and 900 and are provided by credit bureaus. NBFCs will check your credit score before passing a loan application. If the score is below 750, loan rejection is higher. If any previous loan defaults, credit scores account for them, and the current loan application may get rejected. A good credit score is of prime importance when applying for collateral-free loans.
Documents required for collateral-free loan
- Aadhaar card or PAN card of the applicant for KYC.
- Passport, Electricity bill, Water bill, or Rent bill documents for address proof.
- Latest salary slip for employment status.
- Last three months’ salary statement for monthly income.
Personal Loan can be used for personal expenses such as travel, medical, home renovation, or business expansion, but it might be difficult for you to secure an unsecured loan if you don’t meet the eligibility criteria. To get collateral-free at great interest rates, having a higher credit score is necessary. Always check the eligibility criteria and keep all your documents organised when applying for a loan to improve your chances of getting a Personal Loan.
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