Does Changing the Purpose of My Personal Loan Make Any Impact?
Personal Loans have specific characteristics that make it unique. They are:
- There is no need for providing any collateral for the loan
- There is no need to disclose the purpose for which you are availing the loan
Yes, you can mention ‘personal expenses’ in the purpose column,and that should be enough. Banks do not go into the details of the purpose of the loan. However, you have to ensure that you do not use the funds for speculative purposes.
Does the Bank Monitor the End Use of the Personal Loans?
No, it is not possible for the banks to monitor the end use. This loan works by mutual trust. It is precisely why the banks insist on the borrower having an excellent credit score. An applicant having a credit score in the range of 700 and above has a reputation to maintain.
Banks trust that you will not use the funds in any illegal manner such as gambling, investing in shares, bullion, foreign exchange, and so on. It is up to the borrower to maintain the trust.
Why Do People Usually Avail Personal Loans?
People avail Personal Loans for various reasons. We shall list out some of the common reasons below:
- Consolidate their credit
- Pay off Credit Card bills
- The margin for other loans such as Home Loans, auto loans, education loans, and so on
- Pay stamp duty while purchasing houses
- Medical expenses
- Other personal expenses
When Should You Not Avail a Personal Loan?
- For purchasing automobiles: You can go for the auto loan instead. They have a lower rate of interest as compared to the Personal Loans.
- For carrying out home repairs: You can opt for a home renovation loan or a Home Loan top-up facility.
- For speculation purposes: No bank ever gives loan for indulging in speculative activities. It is why banks look at your occupation before approving Personal Loans. If you are a share-broker by profession, the chances of using the loans for purchasing shares in companies is higher. Similarly, if you are dealing in gold ornaments, it is natural of you to use the Personal Loan for investing in bullion. Hence, banks are cautious in this regard.
What are the Pre-requisites for a Personal Loan?
- You have to satisfy KYC norms
- You should have a steady and continuous source of income
- Have an excellent credit score
Will it Matter if I Change the Purpose of the Personal Loan?
It does not matter if you change the purpose of your Personal Loan as long as you do not utilise it for speculative or illegal purposes. Banks do not ask for the purpose because they do not finance a particular asset. They approve the loan based on your income and repaying capacity. There is no need for you to furnish proof of the creation of assets when you take a personal loan. Hence, these loans are extremely risky. It also explains why banks charge a high rate of interest and keep the eligibility criteria at such a high level.
The Risk Factor in Personal Loans
Every year, the banks have to compute their risk-based assets. It has become critical after April 2016 because of the introduction of the MCLR (marginal cost of funds based lending rate) concept. Banks follow this universal procedure for evaluating their Personal Loans.
- Personal Loan balances in case of standard accounts (performing assets) attract a provision of 20% as against the 10% for all other kinds of loans.
- The risk weight percentage for Personal Loans is 100%. It is because there is no collateral at all. It is an unsecured loan in the same way as Credit Cards.
The above factors prove that banks consider personal loans as risky.
A Shift in the Bank’s Perception
The recent events in the corporate sector banking (Nirav Modi-PNB scam) have forced the banks to rethink their priorities. The banks were comfortable approving substantial corporate loans and increasing their loan portfolio. These frauds have shaken the confidence that banks have in the corporate sector. Nowadays, banks are concentrating more on retail financing. Personal loans form an essential constituent of retail financing. Hence, you Find a Lot of New Personal Loan Offers from various banks.
Visit the official websites of banks or Personal Loan service providers to find PersonalLoan offers. Compare the various proposals before deciding to apply for the Personal Loans. Remember that you need not spell out the reason for taking a Personal Loan. It also does not matter if you change your decision subsequently and use the personal loan for a different purpose. However, do not use it for speculative purposes. Safeguard the trust that the banks have imposed on you.
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