Kolkata: Personal loans is the most popular credit instrument in the market. It’s popularity stems from the fact that it does not need an collateral asset to be offered to the lender by the borrower. Moreover, it is quickly disbursed. Many take personal loans to purchase gadgets such as phones, computers, white goods, TV sets etc. Now it may so happen that while you are servicing a personal loan taken to buy a fancy TV, you need to take another loan because of some medical emergency.

A significant point about personal loans is that the end use of funds are not dictated by the lender. One can use it for almost anything from going on a vacation to picking up wedding expenses, from paying admission fees of an educational institution to paying a surgeon’s fee. Therefore, the number of personal loan applications is far higher than any other category of loans. Significantly, there are no guidelines about lending institutions offering more than one personal loan to an individual. Banks, too, don’t have any explicit policy limiting the number of personal loan one can apply for. Banks seem to be more concerned about the total amount one can service from one’s monthly income.

No bar on number of loans

The largest private sector lender in this country, HDFC Bank, has said that it is “technically possible to have two personal loans at the same time”. However, the feasibility depends on a few factors such as creditworthiness, debt-to-income ratio etc.

Creditworthiness: Creditworthiness is measured by Credit Score. “If you have a high credit score and a strong financial profile you are more likely to be approved for multiple personal loans. A credit score above 750 is generally considered excellent and indicates responsible credit handling behavior,” says HDFC Bank.

Debt-to-Income ratio: As the name implies, it measures the amount of EMI as a share of the monthly income of the applicant. A lower debt-to-income ratio implies a smaller portion of the monthly income of an individual is consumed by EMIs. Obviously, it signals better financial health and, therefore, can get a second personal loan in comparison to someone who has a bigger part of his/her income consumed by personal loan EMIs. HDFC Bank states that lenders like this ratio to be lower than 40%. It means, if an individual earns Rs 100 per month, he/she will spend less than 40 on the its EMI.

Repayment history

The repayment history — credit behavior — is of great significance to a lender who is faced with an application for a second personal loan from an individual. The relationship with a particular bank can be of help in this case. If you have a long-standing relation with a bank and it knows your transaction history down the years, you can have an edge in securing a loan.