Personal Loan

A personal Loan is an unsecured loan for short to medium term, which can be easily disbursed without any collateral/security. They are normally disbursed with limited to no paperwork at all within a few hours to a few days.

The versatile end-use is a key feature of personal loans. This unsecured loan can also be used to meet a number of needs, from emergency care expenses to scheduled expenses such as home improvement, marriage, etc.

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Particulars If a Borrower is Salaried If a Borrower is Self-Employed
Age
21 - 60 years
21 - 68 years
Minimum Income
Rs. 15,000 / per month
Rs. 5 lakh / per year (gross)
Employment stability
Total experience- Mini. 2 years
Minimum 2 years in current business

*Note: All the eligibility criteria of getting a loan can be differ from one lender to another.

Eligibility Factors

As the name suggests, a personal loan is given to individuals and not to corporations. Many banks and NBFCs (Non-Banking Financial Companies) provide both salaried and self-employed people / professionals with personal loans. Depending on the form of borrower, the eligibility conditions for a personal loan differ slightly. Some of the primary eligibility variables for personal loans that need to be kept in mind are as follows:

How does it work?

Personal loans are flexible end-use unsecured credits that usually have a period of 12 months to 60 months. Individual EMI quantities are higher if a shorter tenure is selected, while a longer tenure results in lower individual EMIs. The core features of a personal loan are as follows:

To use a personal loan, you do not need to have any collateral such as a house or vehicle. Only on the basis of your creditworthiness is the loan accepted, which depends on your credit score, wages, repayment history, credibility of the employer, etc.

Personal loans may be used for different reasons, such as covering medical emergency costs, travel, house repair, debt reduction, etc., unlike an auto loan or home loan.

Personal loans typically range from 12 months to 60 months with flexible tenure.

With minimal paperwork, you can submit a personal loan online and even offline. Key documents that lenders usually need to send to the borrower include proof of identification, proof of address and proof of income.

Once the application is accepted, personal loan disbursement will occur in a time as short as a few hours. Turnaround times, if you are willing to use a pre-approved loan deal, can also be as short as a few minutes.

The qualifying personal loan amount is dependent on the repayment history of an entity, monthly income , age, occupation, reputation of the employer and other such variables. Personal loans of as little as Rs. 10,000 to as big as Rs. 40 lakh are issued by lenders.

Personal Loan Rates

A comparison of the personal loan interest rates of some leading banks and NBFCs in India are as follows:

Particulars If a Borrower is Salaried
State Bank of India
9.60% onwards
HDFC Bank
10.75% onwards
Punjab National Bank
8.8% onwards
Citibank
9.99% onwards
Bajaj Finserv
12.99% onwards
ICICI Bank
11.25% onwards
Tata Capital
10.99% onwards

Factors Impacting the interest rate of personal loans

Credit Score:

It is a 3-digit number between 300 and 900 that is focused on the financial health and repayment potential of a person. The higher your credit score, the greater the probability of having a personal loan and a lower interest rate.

Loan Amount:

Certain lenders charge a higher interest rate if a higher loan amount is lent by the borrower. As a higher loan amount usually leads to a higher EMI payoff, this is due to the perceived greater chance of default.

Loan period:

Some lenders charge a higher or lower interest rest for a longer period personal loan compared to the same loan with a shorter tenure. Usually, such variance depends on the inner parameters of the bank.

Repayment Capacity:

In some situations, personal loan borrowers will be charged a higher interest rate if their current debt is high. This is because the probability of default is usually increased by a higher fixed commitment.

How to measure accumulated total interest

 I = P x (R/100) 

Where, I = interest payable, P = principal (loan outstanding) and R = interest rate (annual percentage rate) 

While the above formula can be used as in the case of a 1-year tenure personal loan, in successive years as the loan is repaid, multi-year loans may feature different principal. Subsequently, in order to determine the gross accumulated interest of a personal loan, the varying interest amounts for each year must be applied. It is advisable to use an EMI calculator that provides you with information immediately, such as the total interest payable on your home loan, to remove the need to make such complicated calculations.

Tips for having a Low Interest payout

While it may not be possible to get the lowest interest rate on your personal loan, there are three ways you can reduce your loan’s overall interest payout:

  • Choosing a shorter tenure-Higher individual EMI but lower overall interest payout
  • Part pre-payment / foreclosure-Decreases the loan principal, hence lower interest payout 
  • Opting for a lower loan amount-Lower loan principal equals lower overall interest payout

Tips for having a low PL Interest Rate

Typically, if the lender views you as financially responsible, the interest rate applied to a personal loan is lower. Some basic ways for  you to might be able to get a low interest rate on your personal loan are the following:

  • Maintain a high credit score and a clean credit history
  • Ensure that you have a minimum unpaid debt, i.e. a 30 percent or lower credit utilization ratio
  • Apply for a personal loan with a lender with whom you have a prior relationship
  • Opt for a secured personal loan such as a loan against bonds, NSC, KVP, LIC, etc.

Documents required for the Personal Loan approval

With respect to the documentation needed for personal loans, most banks and NBFCs have similar guidelines. The following generic list of such documents has been provided *:

Particulars Documents Required
Identity Proof
PAN Card/ Voter’s ID/ Aadhaar Card/ Passport/ Driving License
Address Proof:
Bank Account Statement/ Aadhaar Card/ Lease/ Property purchase Agreement/ Utility Bill (not more than 3 months old)/ Passport/ Driving License
Business Proof:
Certificate of Practice/ Partnership Deed/ GST Registration and Filing Documents/ MOA & AOA/ Shop Act License
Income Proof
For Salaried Individuals: Salary Slip/ Bank Account Statement/ Form 16
For Self Employed: Previous Year ITR/ P&L Statement and Balance Sheet/ Bank Account Statement

Charges & Fees related to personal loans

Any extra charges may also be applicable to a personal loan, aside from interest charges. The following are some of the most popular ones that should be kept in mind:

Processing Fees

This is a charge to cover the administrative fees associated with a personal loan disbursement. Processing fees are normally between 1% and 3% of the sanctioned loan sum.

Prepayment / Foreclosure Fees

If a sum above the regular EMI payment is made, it is counted as a loan pre-payment. The method is referred to as foreclosure or full prepayment in the event that an unpaid loan is paid off before the expiration of its term. In most cases, at the time of making this full prepayment, lenders charge a fee known as the mortgage fee. Prepayment/foreclosure charges typically range from Nil to 5% of the prepaid principal amount plus applicable taxes on top of the outstanding loan principal.

Late Payment Penalties

Such penalties are imposed when EMI payments are made late by the borrower. Usually, this is a fixed cost that the creditor will have to pay along with the due amount.

Repayment Capacity:

Such penalties are imposed when EMI payments are made late by the borrower. Usually, this is a fixed cost that the creditor will have to pay along with the due amount.

Cheque Bounce Charges

If an EMI payment is skipped because the account connected to the post-dated cheque is low on funds or the account has been closed, there will be a cheque bounce cost. Usually, this is implemented as a fixed charge of about Rs.500.

Various ways to pay your Personal Loan EMI

To ensure that you maintain a clean credit history and a good credit score, timely EMI payments from your personal loan are necessary. There are many forms you can pay off your EMI loan:

  • Standing Instructions- You can use the NACH mandate to set up standing instructions
  • Autopay- You can use internet banking to set up autopay for EMI payment
  • Online Transfer– EMI payments can be made online by using NEFT, RTGS, IMPS payments
  • Cheque / Draft- Post-dated cheques (PDC) or draughts can also be used to pay your PL EMI.

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