Well if you are planning to apply for personal loan it will be great help for you to read this before applying for any personal loan. A personal loan is an unsecured loan. Basically, there are two types of loans a secured loan & a secured loan. Secured loan is a loan taken against some assists or security for example home mortgage loan. But personal loan is unsecured loan because one does not have to keep anything as security with bank for applying for the loan. The trend of taking personal loan is at its peak. It is very helpful if you want a short term finance. Instead of borrowing money from your inner circle you take personal loan to support your need. It is very easy way of raising money for you needs. Personal loan is form of borrowing from bank or financial institutes. This loan option allows the applicant to borrow money from financial institute without any guarantor or collateral. Personal loan is usually for the time period of 12 months to 60 months. But the duration of the loan is completely depending upon the bank or financial institute’s policy. Usually the time duration is short as it is a smaller finance compare to other big secured loans like home loan. It is very convenient as the loan can be repaid by EMIs spread over the time. One of the major reason why one should go ahead with personal loan is the rejection rate of personal loan is very low.
Purposes for Which You can take a Personal Loan
Since the name itself is personal loan it may be taken for variety of personal reasons. The best part is you do not have to disclose the reason for taking the loan even to the bank or financial institution as it is a personal loan. There are plenty of purposes for which a personal loan can be a good idea. For example for travel plans, for wedding, to support medical emergencies, for education, to renovate your house etc.
Following are the sub categories for which you may apply for personal loan:
- Loan for Supporting Weddings:
You may take a personal loan to support you own wedding. In India it is very prominent reason for taking personal loan as the “big, fat Indian wedding culture’ is known to all the financial institutes. They will offer you wedding loan start from buying the jewelry to support the wedding events.
- Home Renovation Loans:
Banks does provide personal loan even for renovation of the home. These loan are tailor made as per your requirements.
- Vacation/Travel Loans:
Holidaying is becoming expensive by the day. As new horizons beckon, the wanderlust in you would love to go places. Personal Loans for travel are now part of the portfolio of most lenders.
- Debt Merging Loans or Debt Consolidation Loans:
A debt merging loan helps you to syndicate many different liabilities under one umbrella. Merging makes it easier for you to manage your liabilities. Instead of many EMIs, you pay just one. Besides, you can gain cheap interest rates as well.
- Loan for Higher Education:
Education is costly and not easily available to everyone. Therefore, education loans are very important. Almost all banks in India offer education loans and the demand has remained steady.
Always Check the Ability of Repayment
Instead of going ahead & taking personal loan for your need it is most important for you to check if you would be in a position to repay the personal loan through monthly EMIs or not. Now a days every financial transaction that you make can be track thanks to CIBIL score. So, make sure to go ahead with the loan amount which can be repaid every month without delays as the failure of monthly EMI payment will affect your CIBIL score badly. It is very important for you to check the ability of repayment before deciding the loan amount. The EMI of your loan must not be more than 30 to 40% because there must be many other expense to meet up every month. And if you do not have many expenses to meet every month you will surely not be in need of personal loan! If you already have an ongoing loan (S) than try to accompany your existing loans with your future loan because this will ease your life a lot. Do not forget to keep the loan repayment duration in mind as you will have to plan the expenses as per that.
Personal Loans & CIBIL Score
CIBIL score is numerical expression depending upon the noted financial transaction by the person in a particular time period. Credit score is credit worthiness of a persona. It is very important instrument for banks & financial institutes as it is the first instrument that they have to check the repayment ability of the candidate. CIBIL score ranges from 300 to 900. CIBIL score of 700 & above is said to be a good score. You can apply for personal loan even though you’re CIBIL score is less. All you need to do is pay higher inters rate compare to the one who is having good CIBIL score. When it comes to personal loan CIBIL score plays an important role. Personal loan can impact your CIBIL score in following ways:
- Remember that every bank check your past repayment history & credit score as the first step of process of deciding if you are eligible for loan or not. Banks do not want to increase their risk by giving a loan to a personal whose repayment eligibility is not high. Having poor credit history will definitely affect you if you are planning to apply for personal loan.
- As I told you earlier also that personal loan will be accountable for CIBIL score. There are plenty of purposes for which banks provide personal loan. Make sure your purpose is amongst the listed one because if you are applying for the purpose which is not valid for personal loan than your application will be rejected & your CIBIL score will be affected negatively.
- At the same time if you’re CIBIL score is good than the chances of you getting personal loan increases.
- Pay your installments on time to maintain good CIBIL score.
- Avoid applying for personal loan if you’re CIBIL score is less than 700.
- If you do not know your CIBIL score know it before applying for the loan.
Eligibility for Personal Loan
Both banks as well as non-banking financial institutes provide personal loan. It is very essential to remember that no matter for which bank of financial institute you are applying for personal loan there are several basic factors which are considered by all the banks & financial institutes. Following is the general eligibility point to take care of:
- Monthly Income :
For most banks & financial institutes the minimum monthly income limit for personal loans is Rs. 12,000 in semi-urban areas whereas it is Rs. 15,000 in bigger cities such as Delhi and Mumbai. The monthly income limit is higher in bigger cities as the cost of living is also high in these cities.
- Criteria for Salaried Applicants:
Personal loan can be availed by both salaried as well as self-employed. When it comes to the personal loan application of a salaried person the employer plays an important role. If you are working at central, state or local government offices or departments than taking personal loan would be very easy for you. Secondly even of you are working in private firm but the firm is well known than it will ease the process. You should be working at least since past 12 months with your current employer.
- Criteria for Self-Employed Applicants:
Self-employed person can also take personal loan as easily as salaried person. The requirement for documents will definitely be different for both applicants. If you are a business man or self-employed, your business should be at least a year old & should making profit in that past one year. The criteria for business turnover will be different in different banks & financial institutes.
Generally the minimum age limit for applying for personal loan is 21 years & maximum age limit is 60. Many banks & financial institutes have altered the upper & lower limit of the age of the applicant. The age is considered just to make sure that you are at the age to repay the loan.
Do remember that sometimes even though you fit in all the eligibility criteria still bank does not grant you a personal loan. This will be happening because banks does not allot personal loan to the personal living in the area which has higher rate of nonpayment.
Documents Required for Personal Loan
The documents required are very simple when it comes to personal loan application. The list of required documents is very prescience & the process for personal loan is very simple & easy. All you need is the documents to support your eligibility:
- Filled application form for personal loan
- Passport size photo
- Valid Proof of age (birth certificate/ Scholl or collage mark sheets/ passport/ voter’s ID/ driving license/ PAN card/ Aadhar card)
- valid identity proof (passport/ voter’s ID/ driving license/ PAN card/ Aadhar card)
- valid address proof (latest utility bill/ ration card/passport)
- Documents of income: Salary slip of last 3 months, 6 months bank statement, form 16 of current year & the offer letter of current employer in case of salaried person. In case of self-employed income tax return & profit & loss & balance sheet of last 2 years, last 6 months bank statement & business proof.
- Proof of continuity of business for self employed
Interest Rate on Personal Loan
Rate of interest in case of personal loan vary from bank to bank. Different banks & financial institute have different policies regarding the personal loan rate of interest. Remember that interest’s rate are usually high on personal loan as banks consider personal loan as risky one as most of the time it is unsecured loan. Banks do not ask for any collateral or guarantor for personal loan. That is why to meet with the risk that they are taking the rate of interest is high. The interest rate on personal loan will start from 10.5% & it can even go as high as 24%. There are many other dependent factors in deciding the interest rate on your personal loan. Understand that banks & financial institute charges different interest rate to different applicant as every individual has different financial situation & history. If a persona has really nice CIBIL score & monthly income is also high than bank may give him less interest rate but that does not mean that you will also able to do that. There are different types of calculating interest rate. Make sure you have understand that inters rate scheme clearly before going ahead with your personal loan. Following are the ways in which banks calculate interest rate:
- Fixed Interest Rate:
This type of interest rate means you have to pay a fixed amount of interest on the principal amount for the entire tenure. The principal amount will not change throughout the repayment period. The amount that you have paid through EMIs will not be deducted from principal every month. The interest and EMIs are calculated flat on the basis of principal, tenure, and the interest rate. This way, you would be paying a fixed amount of interest till your final EMI on the full principal amount, regardless of the amount you have already paid off. This is the rate of interest in which you will end up paying much more than expected. Make sure to calculate the amount of interest before going ahead with this scheme.
- Reducing Balance Interest Rate:
Under this method, a part of the EMI goes directly towards the repayment of the principal loan amount. It means that as you make repayments over time, your principal amount gets lower as does your liability. This means that the interest is calculated on the principal amount remaining, which is going down with every monthly payment. Under this method, you would have to pay less to repay the loan. Compared to a flat interest rate loan, your EMI amount will be lower. In fact the amount of interest paid by you will also be much lower compare to fixed rate of interest scheme.
- Floating Rate:
The rate for this scheme depends on the market conditions. Although it is perceived as a high risk repayment method, an applicant can take a gamble. Thus, the applicant can even get a beneficial interest rate if the market conditions prove to be favorable. There are very few financial institutions in India that offers floating rate of interest.
Charges for Applying For Personal Loan
Following are the charges bank will charge you as the processing charges when applying for personal loan:
- Processing Fee:
Processing fee or the loan application fee is the fee charged by the bank for processing your loan application and it is nonrefundable. Most banks want this fee to be paid at the time of submitting the loan documents. It ranges from 1 to 3% of the total loan amount. The banks may waiver this fees sometimes as a promotional offer.
- Prepayment Charges:
It is nothing but the penalty that has to be paid to the bank if you make a part or full repayment of the loan before the tenure. Some banks have 0% prepayment fee while others charge from 2 to 5% of the outstanding amount.
- Late Payment Charges:
If the monthly installment is paid at a later date than the prescribed one, the bank adds a late payment fee which is usually 2 to 5% of the monthly installment.
Comparison Table of Personal Loans from Top Banks/NBFCs
|Bank/NBFC||Minimum Loan Amount||Maximum Loan Amount||Minimum Tenure||Maximum Tenure||APR||Processing Fee|
|Axis Bank||INR 50,000||INR 15,00,000||12 months||60 months||15.50% – 24%||1.50% to 2.00% + Service Taxes|
|Bajaj Finance||INR 100,000||INR 25,00,000||12 months||60 months||14.25% – 16.75%||2.25% – 3% of the loan amount|
|Capital First||INR 50,000||INR 400,000||24 months||36 months||16.00% – 24.00%||1.99%|
|Citibank||INR 50,000||INR 25,00,000||12 months||60 months||11.49% – 20.00%||0.25% to 1.50%; Min – INR 999, Maximum – INR 25,000|
|HDFC Bank||INR 100,000||INR 25,00,000||12 months||60 months||11.49% – 22.00%||0.25% to 1.50%; Min – INR 999|
|ICICI Bank||INR 100,000||INR 25,00,000||12 months||60 months||11.49% – 22.00%||0.25% to 1.50%; Min – INR 999|
|IndusInd Bank||INR 50,000||INR 15,00,000||12 months||60 months||11.25% – 26.00%||Up to 2.50% of loan amount|
|Kotak Mahindra Bank||INR 50,000||INR 20,00,000||12 months||60 months||11.50% – 24.00%||1.0% to 2.0%|
|Standard Chartered Bank||INR 100,000||INR 15,00,000||12 months||60 months||11.99% – 15.50%||0.50% to 1.00%|
|Tata Capital||INR 75,000||INR 15,00,000||12 months||72 months||11.99% – 19%||1.50% to 2.00% + Service Taxes|
Advantages of Personal Loan
Following are the lucrative reason why you should go ahead with personal loan:
- Build Your Credit Portfolio:
Personal loans are a smart way to enlarge and form your credit portfolio within a short period of time. Also, they can be a good way to surge your credit limit since your credit limit is directly related to the health of your credit portfolio. A properly managed loan adds to it positively.
- Quick Processing:
Personal loans do not require extravagant paperwork. Documents required for personal loan are so brief. Most banks grant personal loans instantly if your credit history seems good enough and you are an existing customer. For example HDFC Bank’s 10-second loan for people holding a savings account with the bank. Many banks & financial institute provides door step service for documents. You even do not have to visit the bank for submitting the documents. The bank executive will come to your place for collecting the documents.
Personal loans are very flexible in nature. You are under no obligation to use the loan amount in a specific way. You can use it for supporting your business expenses, go on a vacation, pay for a wedding, make a major purchase, or renovate your home. Such flexibility from personal loans makes them a preferred choice for a number of situations, especially where unexpected expenses arise.
Things to Take Care of while Applying for Personal Loan
Well it is very easy now a days to get the personal loan. Many a times your existing bank or financial institute will offer you the pre-approved personal loan but it is very important to remember that every coin has two sided. So do analysis the other side well. To help you do that following are the list of thing you should keep in mind before going ahead with personal loan:
- Processing Charges:
Do consider processing charges offered to you by a bank. It may happen that some other bank will offer you lesser processing charges. So compare it well before taking final decision.
- Prepayment Charges:
Well, if you want to pay the personal loan in advance before the time it will definitely cost you. If you have the plan to pay the loan in near future than do pay attention to the prepayment charges that the bank would impose you. Make sure to choose the option with lesser prepayment charges for your own benefit.
- Penalty Charges:
Attention do not just glorify by the offer of personal loan made by a bank do study the offer carefully & do not overlook the penalty charges mentioned by the bank. If you are not going to pay the EMIs on the said date than you will have to pay penalty charges around ⁱ-5% of the EMI which is not less. So, do not forget to plan the payment of EMIs before the time pass away.
- Calculate Interest:
As I mentioned earlier that there are three different ways in which banks charges you with interest rate. Do check the interest rate type followed by ban & do not forgot to calculate total interest rate before applying for the loan. There is a smart way to calculate your interest on the personal loan i.e. calculate it online. Calculation of interest will give you the actual cost of your borrowing which is very important when you are borrowing money. If possible do choose reducing interest rate over flat rate as it will make you loan much cheaper
- Focus on Need not Eligibility:
Well many time we ended up taking the loan which is much larger than the nature of our need. This happens as we have focused on the eligibility of the loan that we can opt for instead of the need. Always calculate your financial need & do consider your financial repayment ability (ability to pay EMIs) while calculating it. Bank may offer you a personal loan for 3 Lakh which is your upper limit eligibility of borrowing but if you need just 1 Lakh borrow 1 Lakh instead of 3 Lakh.
- Tenure of Loan:
Banks usually offer variety of repayment periods. Personal loan tenures generally do not last longer than 60 months. This period is determined based on your capacity to repay the loan as well as the amount of the loan. You may be able to choose the repayment period as per your preference but you have to be careful while doing that. A lower tenure means that you would have to pay less total interest but your EMI amount will increase. On the other hand, a longer tenure results in lower EMI amount but higher interest outflow.
- Ponder on the Number of Ongoing Loans:
This factor is related directly to your credit history, and consequently, your credit worthiness. It will also impact your ability to repay your personal loan. Banks usually do a check on the number of active loans and debt you currently have before permitting their approval for a personal loan. If you already have multiple outstanding loans such as a home loan, car loan, or education loan, then you should escape applying for a personal loan. If it does get approved, it will increase your financial burden. Additionally, banks do not consider applicants with multiple outstanding loans as good candidates for personal loans. They may simply reject your application altogether.
Ask for Details of Life Insurance That Comes Along with Personal Loan
Most banks & financial institutes have tie an insurance with personal loan. It is definitely unwanted but it has become part of their policy which they are not going to change. So, here are some important things to remember while dealing with the insurance accompanying your personal loan:
- Check the insurance premium payable with the loan. This may range from 1% to 5% of the loan amount depending on type of cover, amount, age of borrower and other factors as determined by the insurance provider
- By availing funding of the premium through loan amount, not only will you have to pay back the premium but also interest on the premium amount at same interest rate as the personal loan
- Share the insurance details with your family and keep the insurance papers with the loan documents.
- In case of an unfortunate incident, some policies may some amount to the family in addition to paying back the outstanding loan to the bank
Here is how You Can Get Best Deal for Personal Loan
- Identifying the need, doing your research and shopping around will ultimately pay in dividends and lead you to uncovering the best personal loan for you.
- If you have a loan amount in mind and have recognized what type of loan you require then it’s time to get serious and start comparing.
- Comparing various personal loan is not at all difficult task now a days. There are many portals which has already compared as many options as you have for personal loan. All you need to do is log into the portal & read the comparison. Most of these portal even offers the feature of applying online. So once you have finalize the vendor from whom you want to opt for personal loan you can directly apply online.
- The results will show a list of products that best suit your criteria. You can then further filter your search by comparing the interest rates and fees, and once you find one that best meets your criteria, you can apply online. Your chosen lender will then be in touch with you to notify you of the status of your application.
Smashing the Myths
There are many myths associated with personal loan I am going erase them all & make it very clear to you:
- Personal Loan is Suitable Only for Salaried Candidate:
A common fallacy is that the Personal Loan is only for the salaried class. Nothing could be further from the truth. A number of banks and NBFCs extend Personal Loans to the self-employed as well. However, the eligibility criteria may be different for such borrowers.
- No Tax Benefits:
This is another common, but mistaken, grouse against Personal Loans. Under Section 24(b) of the Income Tax Act, you can claim tax benefits for a Personal Loan.
- Spending on a Residence:
Say, you take a Personal Loan to buy a property or home for residential purposes. Or you might use the money to build a home. Perhaps you use the loan to carry out renovations or repairs in your home. In all these cases, you can claim tax benefits on the interest paid. The deduction is capped at Rs. 2 Lakhs for a self-occupied house. There is no upper limit for a property that you rent out.
- Purchase of Asset:
You could use the Personal Loan to buy assets. These could include shares or jeweler, for example. The deduction would apply when you sell the asset. The interest paid on the loan would add to the cost of acquisition. This would reduce the capital gains and the tax payable on it.
- Business Expenses:
When filing your returns, you can claim benefits on the interest paid on the loan. The interest paid would qualify as a business expense. This would bring down your taxable income.
- Overpriced Interest Rates:
The truth is the rate of interest for a Personal Loan typically ranges from 11.49–24%. This may seem high. But compare the rate with credit cards where interest rates can be much higher. These days, it is easy to get a Personal Loan.
Checklist for Your Personal Loan Application
Lastly in a nutshell giving you the brief checklist for applying for your personal loan:
- Work out the amount you want to borrow.
- Calculate how much you can afford to make in repayments.
- Work out how long it will take to pay off, and how often you want to make the repayments (weekly, fortnightly or monthly.)
- Decide whether you will require a secured (if buying an asset such as a car) or unsecured loan.
- Will a fixed or variable rate personal loan suit you?
- Compare personal loans online, look for one with a lower interest rate and lower fees.
- Organize any documentation and paperwork that is required to support you application and have this ready.