Does the Purpose of a Personal Loan Matter?

A personal loan means exactly that – it can be used for any personal need and there is no need to explain officially why it is being taken. Since there is no end-use tied to it, your eligibility does not depend on the purpose of the loan. This also means that you do not officially need to write down the reason why you are applying for a personal loan and how you intend to use it. However, you may be asked by your loan officer the purpose of taking a loan, since a lender always wants to make sure that you will be able to pay back the loan. 

Let us understand this a little better.
 

What is the Purpose of a Personal Loan? 

The purpose of a loan is the reason why a person applies for funds from the lender. This could be anything from debt consolidation, marriage expenses, medical emergencies, overseas travel and education related expenses, home renovation etc.

Does the Reason for a Personal Loan Matter?

Technically, no. Personal loans are taken for personal reasons and a higher premium is charged for it. However, if you are applying for a loan that is of high value, lenders usually ask why you need it in the first place. Also, the lender might ask the reason for personal loan so that they can suggest you better loan categories for example there are loans designed for marriages, education, medical emergencies and so on and so forth. But, the purpose for which you intend to use your personal loan does not affect the approval of that loan.

The purpose of your personal loan will not affect the interest rate that you will be charged. Hence, you can freely talk about the purpose of such a loan without any worries.

What are the factors that lenders consider when approving a personal loan?

Even though the purpose of a personal loan does not matter, there are certain factors that do impact loan approval.

1. Credit Score 

The first factor that a loan approval officer will check is your credit score. A credit score is, essentially, a score that every individual receives denoting how credit-worthy a person is. As soon as you open a bank account, you will be accorded a credit score. The higher the credit score is, the more likely it is that you will be able to repay your loans  
 

2. Income

Depending on the loan amount, the loan approval officer will check your monthly income. If your monthly income is high enough; means if you are leftover income after paying of your various bills, EMIs, etc., is satisfactory. it is much more likely that the officer will approve your loan. If you want to take out a large personal loan and your monthly income is low, then your chances of receiving the loan will be much lower.
Essentially, lenders want to know if you have the ability of repaying the loan.  
 

3. Age

It may sound surprising, but your age is also a factor for loan approval. You may not receive the loan if you’re too young or too old. When you’re very young (like 20 years old), then you still don’t have enough credit history and you’re either still a student or you’re new to the workforce. It is likely that you don’t have the financial stability to be able to repay the loan.

Further, lenders prefer not to provide loans when the loan would mature after the person reaches 65 years of age. This is because at such an age, people tend to retire and they might not have a source of income. They may also be facing chronic health problems which make it less likely that they will be able to repay the loan.  
 

4. Repayment Schedules

Lenders generally prefer shorter repayment schedules. A shorter repayment schedule means that the lender can recover the loan However, you should never promise too short a tenure for payback. This may significantly increase the amount of money that you have to repay per month, so you should take that into account.  
 

5. Personal Loan Documentation

Your documentation should be in order when you apply for a personal loan. These documents can include your PAN Card, Identity Proof, Address Proof, Financial Statements, and so on.

The loan officer will go through all the personal loan documents to ensure that everything checks out. If there is any discrepancy, then it is likely that your loan won’t get approved.

The documents that are required may vary depending on whether you’re a salaried individual or a self-employed individual. 


Also Read: 6 Foolproof Tips That Can improve Your Personal Loan Application
 

Wrapping Up

Personal loans can be highly useful in certain circumstances. If you need to pay high medical bills, or for your children’s higher education, or even for recreational purposes, you can use a personal loan to cover your expenses. Nowadays, personal loans are offered at attractive interest rates and without the need for any collateral, and without the need to explain a purpose. We hope you have found this article insightful and helpful. Need to apply for a personal loan? Apply here.