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Rate of Interest is high ?

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Have multiple existing loans?

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Loan Details

Loans in India

An act of lending property, money or other material goods to another person in exchange of future repayment of principal amount plus interest or any other type of finance charges is known as loan. It is a contract agreed by two parties and the terms and conditions, rate of interest and other charges along with the principal is informed at the initial stages.

Most loans have a limit for the loan period, loan amount and interest rate. Loans are provided by banks, NBFC, government and corporations. Interest generated from these loans and fee received are the main source of income for those who give money as loan. More about types of loans, interest rate factors, eligibility and documentation is explained below.

Types of Loans in India

The main two types of personal loans available in India are secured loans and unsecured loans.

Secured Loans

Secured loan is where there is a need for guarantee or security against the sum borrowed like a fixed or movable asset. In case of default of the loan amount, ownership of the security will be taken over by the bank. Usually car loans and mortgage loans are secured loans. The interest rate of these types of loans will be comparatively less as the risk for the lender is low even though there are many other factors that decide the rate of interest.

Unsecured Loans

Unsecured loan does not require any security, but the lender will charge a high rate of interest on the money borrowed. In case of default, the lender will seek legal assistance for the loss incurred. It is just as higher the risk of the loan, higher will be the rate of interest.

Secured Loans v/s Unsecured Loans

Factors

Secured Loan

Unsecured Loan

Meaning

The loan which is secured by an asset is known as a Secured Loan.

Unsecured loan is the loan in which there is no asset mortgaged as security.

Basis

Collateral

Credit-worthiness

Pledging of Asset

Yes

No

Risk of Loss

Very less

High

Tenure

Long period

Short period

Expensive

No, due to low interest rates.

Yes, because the interest rate is high.

Borrowing Limit

High

Comparatively less

Right of Lender in case Borrower fails to Pay

Forfeit the asset.

Can sue him for the money.

In India almost everyone are making utmost use of the opportunity of loan. This will not just help in short term and long term financial needs but will also generate a lot of tax benefits. There are many types of loans available in India. It is said for almost anything and everything this is used nowadays. Getting a loan is very simple and it can be used for purposes like business, marriage, medical, education, debts, household, two wheeler, car, holiday, for purchase a house, home renovation and others.

Here is the list of popular loans in India and the top three loan provider:

Personal Loans:

When there is an unusual expense like child's marriage, renovation of your home or furnishing, children’s higher education, family holiday, or any other dream to be turned into reality, make use of the personal loan option. With this, you have the option to repay your borrowed amount gradually through upcoming years, no guarantor or security is required, hassle free documentation process- right officials will come to you to collect necessary documents and if all requirements are met, money can be expected within few days.

Top 3 Banks for Personal Loan:

  • ICICI Bank: It has attractive scheme at reasonable interest rates.
  • HDFC Bank: Loan at low-interest rates with or without security.
  • Axis Bank: Axis Bank offers the most flexible personal loans.

Home Loans:

Housing is one of the most basic needs for humans along with food and clothing. It is a major investment that allows a family to cut down on much other expenditure. All those who are looking for a home loan will be looking for the list of best banks that offer home loan. We have furnished this list to make things easier for you.

Top 3 Banks for Home Loan:

  • State Bank of India: Nearly 50% of home loan market is captured by this bank.
  • HDFC Bank: This bank is known as a home loan banker.
  • PNB Housing Finance Ltd.: PNB Housing Finance Ltd. is a wholly owned subsidiary of Punjab National Bank (PNB) and provides housing loans to individuals for construction, purchase, repair, and upgrade of houses.

Business Loan:

Business loan is one of the great way to increase financing towards various business needs. There are many banks that offer loan up to ₹3 million with and without collateral with pre-approved offers. This amount can be used for expansion of existing business or the start a business from the scratch.

Top 3 Banks for Business Loan:

  • HDFC Bank: Choose for triple benefits of fast loan, competitive pricing and transparency on charges.
  • ICICI Bank: ICICI Bank offers business loans to match specific needs of every business. ICICI Bank gives the option to choose the most convenient and suitable solution for business.
  • Citibank: Choose for trade finance at LIBOR denominated rates to keep your business globally competitive.

Car Loan:

Whether new or used cars, if you have a desire to own it, India offers car loan. This can be used to purchase a car and has the option to repay the amount through EMIs and monthly interest.

Top 3 Banks for Car Loan:

  1. HDFC Bank: HDFC Bank offers Car Loans at rate of interest starting 9.45% for up to 7 years tenure.
  2. ICICI Bank: ICICI Bank offers Car Loans at rate of interest starting 9.5% for up to 7 years tenure.
  3. CAPITAL FIRST: Capital First offers Car Loans at rate of interest starting 13% for up to 7 years tenure.

Debt Consolidation Loan:

This is more like taking one bulk loan amount to clear all other outstanding debts – just like debt refinancing. There are lots of banks in India that offer such loans to individuals who are self-employed or salaried.

Top 3 Banks for Debt Consolidation Loan:

  1. Kotak Mahindra Bank: One of the best bank with low rate of interest and less fee charges
  2. HDFC Bank: this bank offers lot of flexibility and is quick at processing.
  3. Citibank: It offers much professionalized service and turnaround time is very quick

Bike Loan:

Whether you have an eye on simple two-wheeler or costly bike with a 1000cc engine, you can opt for a bike loan to make your dream a reality. By this you can own a bike today and pay the principal plus interest over the time of loan period.

Top 3 Banks for Bike Loan:

  1. HDFC Bank: Rate of Interest -12.90% - 24%, processing fee 2% of loan amount, 1% for HDFC Account Holders, up to 4 years tenure.
  2. ICICI Bank: Rate of Interest -12.5%, 0.25% one-time fee, and up to 3 years tenure.
  3. Baja Finserv: No Rate of Interest, ₹ 500 one-time fee, and 5 years tenure.

Home Renovation Loan:

It is essential to keep in mind; home loan is different from home renovation loan. Everything from the loan charges, loan amount to rate of interest is different for both. Home renovation loan should be used only for renovation purpose.

Top 3 Banks for Home Renovation Loan:

  1. HDFC Bank: Rate of Interest - 8.35% - 8.95%, Up to 0.50% of the loan amount or ₹ 3,000 whichever is higher, plus applicable taxes, up to 15 years tenure.
  2. ICICI Bank: Rate of Interest - 8.35% - 10.99%, 0.25% one-time fee, and up to 15 years tenure.
  3. Baja Finserv: Rate of Interest - 8.35t, Low processing fee, and 15 years tenure.

Others:

Apart from the ones listed above there are many other types of loans that can be availed in India. Every individual has equal right in India to avail for these loans at their time of need.

How does Finance Buddha works?

Finance Buddha is not just a loan comparison site, but you can directly apply for a loan at the best bank. This website is available for free to provide all necessary information for those looking out for loan. Applicants can check the loan eligibility according to the type of loan required, post which choose the bank to apply for a loan. Considering the request banks will contact the applicants for further processing.

How to choose the best loan at Finance Buddha?

Choosing best loan is always a tough task for each and every one who is looking to avail loan. It is essential to consider the below factors while choosing best loan.

  • Application Fee
  • Credit Evaluation
  • Loan Processing Fee
  • Appraisal Fee
  • Eligibility
  • Documentation 
  • Underwriting Collateral Requirement
  • Partial Payment Fee
  • Prepayment Fee
  • Default Charges

How to apply for a loan at Finance Buddha?

Here you just have to update your details such as Current Company, take home salary, existing EMI amount, Salary account bank, loan requirement and tenure, and it will auto-calculate the amount that should be paid per bank interest rates, its processing fees, etc. Once this information helps you to decide the bank you wish to avail loan, click on “Apply Now” and share your contact. Bank officials will contact you directly to make your interest executed. Here all types of loans can be applied and bank will get the feed of the same immediately.

Loans Interest Rates

Interest rates on loan depend on the type of loan one is availing. There are lots of factors that determine the interest loan for a loan and it is calculated on an individual basis. Thus different people will have different interest rates based on factors mentioned below. There are mainly two types of interest rates calculation. It is Base Lending Rates and MCLR- Marginal Cost of Funds based Lending Rate. It is calculated on marginal cost of the borrowing and return on the net worth for banks.

Base rate Calculated on

MCLR Calculated on

Cost of the funds (interest rate given for deposits)

Marginal cost of funds

Functional expenses/running cost

Negative carry on account of CRR

Cost of CRR

Functional cost/running cost

Tenure

Premium

Types of Interest Rates

Rate of interest is always a worrying factor for every investor. It is up to the borrower to decide whether to choose a fixed or floating rate of interest.

  1. Fixed Rate: In Fixed rates, the rate of interest is locked throughout the life of the loan, this cannot be changed at any time even if the market rate increases or decreases over the coming years. It is a kind of hedging of interest rate to the market volatility.
  2. Floating Rate: This is right opposite to fixed rate, where the rate is subject to market volatility. If the interest rate in the market falls, you will have to just pay the reduced rates and vice versa. The risk is high here that is if the interest rate in the market shoots up then it will directly impact the borrower. However, usually short term borrowers will choose this type of rate of interest as they speculative the rate of interest to not change within few months.

Factors

Floating Interest

Fixed Interest

Flexibility

Flexible according to market volatility.

No flexibility.

Risk of uncertainty

High

Low

Protection against Cash Rate Fluctuations

No

Yes 

Cheaper

Comparatively cheaper

Not as cheaper as floating interest rate

Pre-Payment Penalty

Not applicable

Applicable 

Option to lower interest rate in future

Available

Not available 

Transparency on interest calculation

High

Low

During inflation

Not beneficial

Beneficial

Hedging against market volatility

Not possible

Possible

Suitable for risk averse customers

No

Yes

Stability

Fluctuating EMI amount and Loan Tenure

Stable EMI amount and Loan Tenure

Factors That Affect Interest Rates:

  • Location of the Borrower: The state or city you live in will decide the rate of interest. According to the rural and urban standard of living the rate of interest varies.
  • Loan Amount Requirement: Opt for loan according to the necessity. Take loan only to meet the needs not up to the limit available. If the loan amount is huge, then the interest percentage will be equally proportional. The more amount your take, the higher will be the overall interest payment.
  • Credit Score: Without any doubt, this is a crucial factor. The credit worthiness will directly impact on the rate of interest charged. Thus is important to keep a good track record of financial obligations.
  • Loan Term: This plays a key role. To simplify things on this factor - shorter term loans will have low interest rates; similarly reduces overall cost, but this calls for higher EMI payments. Choose a loan term that best sinks with your requirements.
  • Loan Type: There are a lot of loan types such as conventional, VA and FHA loans. Rates will be significantly unique depending on the loan type the applicant chooses.
  • Interest Rate Type: The two main types of interest explained previously is another core factor to determine the interest rate. Fixed and floating rate of interest has its own share of rate percentages.
  • Age: The younger the applicant is more money will be sanctioned. Also this increases the probability of getting the loan approved quickly. Interest rate of any loan is dependent on this factor.

Eligibility Criteria for a Loan

Banks offer loan only if the individual is meeting all eligibility criteria. Among the long list of factors that makes an applicant eligible for loan, few important ones are mentioned below:

  • Age Criteria: The younger the applicant is there is more probability of getting loan. Most banks offer loan for salaried employees only if they are between the age group of 23 to 60 years. However for self-employed this will change to 24 to 65 years.
  • Employment Stability: It’s a crucial aspect for loan consideration. Unless the applicant is salaried and employed for at least 2 years in the same profession or if the applicant is self-employed with minimum 5 years of total earnings loan will not be processed.
  • Credit Rating: Apart from the applicant’s company’s performance, individual credit rating has a lot of importance. Good credit rating will increase the chance of getting the loan with more flexibility on loan. Default payment records, fraudulent tracks, and outstanding loan, will reflect negatively on the applicant, this could lead to bank’s cancelling the loan request or will charge high rate of interest.
  • Financial Situation: For this factor, not just present status is considered, the past records of financial stability holds lot of value in deciding the eligibility for a loan.
  • Employer: If the applicant is working with an employer who has high reputation and impressive turnover, the credibility of the applicant will respectively increase. Being a part of reputed and high turnover companies is an asset for the applicant.

Top 5 Common Reasons for Rejection of a Loan Application

There are several reasons because of which a personal application gets rejected. Some may be known to you whereas some remain unknown to you. Personal loans are also rejected due to some solely on the bank discretion despite the applicant meeting major eligibility criteria.

1.   Poor Documentation can cause Rejection of a Loan Application

Lenders always verify each and every document you provide in your personal loan online application. So, before you submit it, double check the information you provide before submitting your instant personal loan application. In case the lender finds any inconsistency in your information provided, they will reject your personal loan application.

Some common documentation error which leads to personal loan rejection are:

  1. PAN Card: wrong name and/or DOB in PAN Card
  2. Voter ID card: Wrong Name and/or DOB and/or Permanent Address and/or Gender.
  3. Bank Statement: Name Mismatch and/or Address Mismatch

2.   Minimum Required Income Criteria not met

Every lender has their own defined eligibility criteria to be fulfilled in terms to get qualified for a personal loan. This eligibility criterion contains income factor too. The minimum required income criteria varies from lender to lender and if an applicant is not able to meet this criterion the loan application gets rejected.

3.   Unstable Employment History of the Applicant

Most of the lenders offer personal loans to applicants who have a stable history of employment. Unstable employment history of the applicant increases the risk factor to the lenders for the repayment. So, if you do not have a stable job or have a history of switching jobs multiple times, your personal loan application can be rejected. Lenders want customers with stable employment or business so that they can be regular with income and hence with the EMIs and repayments.

4.   Low CIBIL

CIBIL is the basic representation of your financial history. It shows all your borrowings and repayments made against your borrowings. A low CIBIL indicates that you were not timely with your EMIs or you have missed some of your EMIs. This increases the risk to the lender and hence to be on a safer side they reject applications with low CIBIL score.

5.   Higher Income to Debt Ratio

Income to debt ratio is also an important thing which lenders consider while processing a personal loan application. A higher income to debt ratio means the applicant is already into debt which is more than 40% of his/her income. Generally, lenders reject such applications have they are not much sure about their repayment.

Documents Required for Loans

  1. Passport size photographs (including those affixed in loan application)
  2. Identification Proof: Voter ID card / Passport / Driving License / PAN Card.
  3. Residence Proof: Voter ID card / Passport / Electricity Bill / Telephone Bill.
  4. Business Address Proof: In case of non- salaried borrowers.
  5. Statement of bank account for the last six months.
  6. Signature identification from present bankers.
  7. Personal assets and liabilities statements in bank’s standard format.

For Salaried Employees:

  • Original salary certificate for last month.
  • DS certificate- Form 16 or copy of I.T. Returns for the last two financial years, duly acknowledged by I.T. Dept.

For Self-Employed Individuals:

  • Three years I.T. Returns duly acknowledged by I.T Dept. / I.T. Assessment Orders for Computation of income.
  • Copies of “challans” in respect of advance payment of income tax.

Dos & Don’ts of a Loan:

Just as everything has dos and don’ts, the same is the case of loans. The below list will help you understand the same.

Dos:

  • Never borrow more than what is required: This can lead you to pay interest for unnecessary debts. It is essential to consider all requirement for a loan, sum up the amount requirement and then start looking for loan option, interest rates, monthly EMI, tenure etc.
  • Borrow what you can afford to repay: Taking loan that you will struggle is pay is not a good idea. Before taking a loan, make a thorough calculation of how much you will be able to pay.
  • Use the Money for Necessities: Taking a loan ‘just because it is easy to get one’ is the worst idea. Avoid putting yourself into debt. Be clear why a loan is required and stick to the plan.

Don’t:

  • Jump into Payment Protection Insurance: Check if there is a need for PPI and even if there is a requirement; take it from an independent company instead of the loan provider.
  • Ignore the Policy and Procedures: It is worth you spending an hour extra now to read the guidelines provided bank instead of later regretting. Ignorance of terms is not an excuse.
  • Miss Payments: Though it sounds obvious, don’ts list will be incomplete without this point. Missing or delaying one single payment will reflect on all aspects of your financial life. Apart from the extra interest that is required to be paid, you will end up having weak credit rating score. 

Loans & Taxes

Here is the list of loans that are taxable and tax free. This list will help you in manage financial requirements by tax benefits. Think wisely and choose the one reap maximum tax benefits and serves your purpose.

17(2) (viii) with Rule 3(7) (i) states:

  1. Interest free loan or loan at concessional rate of interest given by an employer to the employee (or any member of his household) is a perquisite chargeable to tax in the hands of all employees on following basis:
    1. Interest free loan or Loan at concessional rate of interest
    2. Find out the ‘maximum outstanding monthly balance’ (i.e. the aggregate outstanding balance for each loan as on the last day of each month);
    3. Calculate interest for each month of the previous year on the outstanding amount (mentioned in point 1) at the rate of interest (given in point 2)
    4. Find out rate of interest charged by the SBI as on the first day of relevant previous year in respect of loan for the same purpose advanced by it;
    5. Interest actually recovered, if any, from employee
    6. The balance amount (point 3-point 4) is taxable value of perquisite
  2. Nothing is taxable if:
    1. Loan in aggregate does not exceed ₹20,000
    2. Loan is provided for treatment of specified diseases (Rule 3A) like neurological diseases, Cancer, AIDS, Chronic renal failure, Haemophilia (specified diseases). However, exemption is not applicable to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

Prepayment and Part-payment

All of us would have heard about these two terms when it comes to taking a loan and not many still know the actual difference between the same. It is pretty and easy to understanding.

Prepayment

Prepayment is in layman sense being able to repay the complete outstanding loan amount even before the actual tenure of the loan. This is also called as pre-closure. Primarily the principal amount will be repaid along with the pre-payment charges.

The pre-payment charges varies from bank to bank according to their policies, these charges will be intimated at the time of loan approval.
Another important doubt with regard to pre-payment is when can this be done during the tenure of the loan? While some banks will have just 6 months as the locking period, other have up to 12 months. After continuous EMI payment for the set time frame of 6- 12 months the total outstanding loan amount can be pre-paid. Along with this there will be some amount of pre-closure charges and this varies from zero to 5% on the outstanding loan amount from bank to bank.

If you know to play the cards well, you can either choose a bank that has zero pre-payment charges or look out for the offers from reputed banks that give this offer to the customers at certain specific period.

Part-payment

On the flip side part-payment is just closing the outstanding loan amount partly. Say your actual loan amount ₹500,000 and 2 years down the line the balance outstanding is ₹300,000. If you are expecting to receive around ₹150,000 of surplus fund, this can be used to partly repay the loan amount. Thus your outstanding loan amount will drop to ₹150,000 and there will be a proportional change in your EMI and rate of interest on the loan. This is the easiest way to repay the loan amount even before the actual tenure and your exposure to risk also drops. There is option to pay any amount between 2 to 5 times of the actual EMI amount at least once a year as the part payment.

Which loans should you prepay first?

In case of surplus fund the loan with higher rate of interest has to be pre-closed first. The higher the interest rate is; most part of the EMI amount will be flowing towards the interest of the loan instead of the principal. Thus the thumb rule is to pre-close the loan with higher rate of interest. The sooner you pre-close a loan with higher interest rate, higher will be the benefits. Of course, there will be some charges for the same which the borrower will have to incur but this amount is comparatively lesser than the actual interest you would end up paying until the complete tenure of the loan. Also it is said that home loans are generally cheaper, but before taking a decision compare all the outstanding loan interest rates and then make a wise decision.

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