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Everything you need to know about Personal Loans

Personal Loans- A complete guide

1. What is a personal loan?

A personal loan is an unsecured loan taken by individuals from a bank or a non-banking financial company (NBFC) to meet their personal needs. It is provided on the basis of key criteria such as income level, credit and employment history, repayment capacity, etc.

Unlike a home or a car loan, personal loans are not secured against any asset. As it is unsecured and the borrower does not put up collateral like gold or property to avail it, the lender, in case of a default, cannot auction anything you own. The interest rates on personal loans are higher than those on home, car or gold loans because of the greater perceived risk when sanctioning them.

Loan Calculator

To find out how much your personal loan monthly EMI is, use our Personal Loan EMI Calculator

2. How do personal loans work?

A personal loan normally works through the following process.

a. Apply for the loan

If you’re looking to get a personal loan, you’ll have to complete an application and wait for the approval. The application can be through online means or directly over submission of a completed application form at the branches. The documents required to apply for personal loans are discussed below.

b. Approval

It is a process that may take a few hours or a few days. If you have a pre-approved facility or your credit score is high, your application might get approved even within a few hours. In normal cases, the approval process consists of credit assessments including Credit Analysis Memorandum (CAM) reports due diligence, address verification, document verification, business/ employment verification, tele verification etc.

c. Disbursement

Once you’re approved, the lender will disburse money into your bank account, and you use the funds for your intended purpose. You will also start to repay the money right away. In certain lenders, you need to complete some pre-disbursement documentation, if the same is not done during the approval stage.

d. Repayment

The loan can be repaid in the form of EMIs via post-dated cheques (PDC) drawn in favour of the bank or by releasing a mandate allowing payment through the Electronic Clearing Services (ECS) system/ E-NACH. 

There are Throughout the loan term, your lender will likely report your account activity to the credit bureaus. Making on-time payments can help you build a positive credit history.

3. What are the uses of a Personal Loan?

There are several ways in which Personal Loans can be used:

  • Personal loans can be used to consolidate high-interest credit card debt or debt from other high-interest loans. Personal loans tend to come with lower interest rates that can help consumers save money on interest or secure a lower monthly payment.
  • Investing in yourself- It’s common to take out personal loans for educational purchases, such as pursuing a workplace certification or attending a career-boosting seminar.
  • Expensive events like weddings always require a lot of money to manage. You can pay for it with a Personal Loan.
  • You can use it to buy that new laptop or phone with state-of-the-art technology.
  • If you wanted to buy a house, or construct a house, you may use a personal loan as a source of finance and avail of tax benefits.
  • You can finance your travels with a Personal Loan for travel.
  • Cash flow issues can also be dealt with through a small Personal Loan, so you don’t have to sacrifice day-to-day requirements during a cash crunch.
  • Any other personal purpose that you find essential.
4. What are the benefits of personal loans?
  • Hassle-free loan application process. You can apply for a personal loan online, using a net banking facility, through an ATM, Fintech Apps or personally at any bank branch. This process requires minimum documentation and the approval process is quick.
  • Personal loans generally have fast approval times and payment times, making them useful for emergencies or other situations where you need money quickly. Some personal loan lenders can deliver the money as soon as the next business day.
  • Most of the existing bank/ NBFC customers can get a pre-approved loan quickly. You need to visit your net banking and check whether you have a pre-approved personal available or not. Also, you can check the same with your branch. Pre-approved personal loans will make the process super-fast.
  • A personal Loan can be used for any purpose. A Car Loan or a Home Loan must be used for that specific purpose but the Personal Loan can be used for any purpose like vocational courses, home renovation, medical emergency, or travel, just about anything. The choice is yours.
  • Unsecured personal loans don’t require collateral for you to get approved. This means you don’t have to put your car, home or another asset up as a guarantee that you’ll repay the funds.
  • There is minimal documentation required in order to obtain a Personal Loan. This also cuts down on the processing time for such a loan. All you need to secure a Personal Loan is ID proof, address proof and income proof.
  • The payment terms are flexible, and you can choose your tenure as per your suitability.
  • You can also claim tax benefits on the interest payments if you use the loan amount for buying, constructing or renovating a home, or for higher education purposes.

5. What are the documents required for a Personal Loan application?

Although the documentation varies from lender to lender, some of the essential documents you must provide along with your application form include:

  • Proof of income (salary slip, bank account statement, ITR forms)
  • Proof of residence and identity proof
  • Certified copy of your degrees and licence (this is applicable only for self-employed applicants).

6. How to Check Eligibility for Personal Loan

You need to be sure that you are eligible for a Personal Loan before you consider applying for one. The eligibility criteria dictate that you can apply for a Personal Loan. Though the eligibility criteria changes with lender policies, the normal criteria to apply for a personal loan are:

  • You should be a salaried doctor, a chartered accountant, or an employee of any private limited company or a Public-Sector undertaking (including Central, State and Local bodies).
  • The age range should be from 21 to 60 years.
  • You have held a job for at least 2 years, with a minimum of 1 year with the current employer.
  • Those who earn a minimum of 25,000 net income per month.
7. Are there any foreclosure charges?

If you decide to pre-pay the loan before the end of the actual term, the lender may levy penalty charges known as foreclosure fees. This penalty usually ranges from one to two % of the outstanding amount.

8. How to get a personal loan?

If you’re ready to apply for a personal loan, take these steps first:

  • Pull your credit score

A higher credit score will give you a better chance of getting approved for a personal loan with the best rates and terms. If your credit score is on the lower end, dispute any errors on your credit reports and take steps to improve your credit score before applying.

  • Pay down debt if you can

A lower debt-to-income ratio (also called fixed obligation to income ratio (FOIR)) can also help you qualify for a loan with good terms. If yours is high — around 45 % or more — then paying off some of your debts or increasing your income will help.

  • Get quotes from multiple lenders

Once your finances are in order, get loan quotes from several lenders. Compare the following between different lenders

    • Interest rates
    • Monthly EMI per lakh
    • Loan amount
    • Processing charges
    • Foreclosure terms and charges
    • Loan terms
    • Lender reputation and the time required to process the loan.

Some lenders offer preapproved, which allows you to estimate your loan terms without hurting your credit.

  • Submit documents to your lender

When you decide on a lender, you’ll need to formally apply for the loan and submit a variety of financial information. This could include your KYC docs, ITR, bank statements, pay slips etc.

  • Receive the money

If your loan application is accepted, the lender should send you the funds within a few business days. You can then use the money for your intended purpose. Setting up payment reminders can help you avoid late fees and bruises to your credit.

9. How to choose the best Personal Loan?

There are several factors that go into choosing which Personal Loan works for you. Time, urgency and capacity to repay are important factors you need to consider.

a. Disbursement Time

The time of disbursement is the time in which the loan is approved. A Personal Loan can be very useful in raising funds quickly, especially in case of an emergency. You need to ensure the processing and disbursement time, before choosing a personal loan.

b. The loan amount and repayment

The amount of loan, tenure and payment are also important as they help determine your EMI. Obtaining the right amount, easy EMIs, and flexibility in tenure help decide what loan works for a person. Calculate your EMI using our Personal Loan EMI Calculator before knowing your monthly EMI burden.

c. Loan Processing

An efficient loan process makes everything easier when looking for a Personal Loan. The overall loan processing

d. Interest rate

The interest rate and the processing fee determine the total cost of the loan. Do pay attention to these factors before you pick a loan.

10. What is the minimum and maximum amount of a personal loan?

Though the exact minimum amount varies from one institution to another, most lenders have set their minimum personal loan principal amount at Rs 30,000.

 The maximum amount that you can avail depends on your income level, your profession and the lender’s assessment of your loan application. Generally, the lenders sanction the loan based on their calculation, so that the EMI is not more than 40% – 50% of your monthly income. Also, the lenders consider if you have any dues while calculating the loan amount.

If you are a business owner or self-employed, the lender will determine the loan amount based on the profits earned and recorded in the profit and loss statement. If you are a salaried professional, the lender will determine the amount based on your salary and other liabilities.

12. Personal Loan- Frequently Asked Questions (FAQs)

What is Personal Loan?

A personal Loan is an unsecured credit provided by financial institutions based on criteria like employment history, repayment capacity, income level, profession and credit history. A personal loan is a loan that does not require collateral or security and is offered with minimal documentation. You can use the funds from this loan for any legitimate financial need.

What are the purposes of a personal loan?

Personal Loans can be used for any personal financial need and the bank will not monitor their use. It can be utilised for renovating your home, marriage-related expenses, a family vacation, your child’s education, purchasing the latest electronic gadgets or home appliances, meeting unexpected medical expenses or any other emergencies. Personal loans are also useful when it comes to investing in the business, fixing your car, down payment on a new house, etc.

What is the applicable rate of interest on a personal loan?

Interest rates vary from lender to lender. Your loan amount, tenure and credit score are the factors that determine the rate of interest.  If you are a habitual defaulter, you may have to pay a higher interest rate. If you have a good credit score, some lenders may levy a lesser interest rate.

How is a personal loan repaid?

A personal loan is repaid in equated monthly instalments (EMIs). An EMI is the total of the principal amount and interest on the personal loan, added up and divided over your chosen tenor. This ensures that you do not feel the burden of repayment and can plan your monthly finances around your EMI amount.

Calculate your monthly EMI.

How is my loan eligibility calculated?

Loan eligibility is dependents primarily on the following factors:

  • Nature of employment and the category of your company where you work. Every bank has a list of companies running into thousands which they have categorised into segments like A, B, C etc depending on the credentials and financials of your employer. The higher the category the higher is the loan eligibility chances.
  • Quantum of loans and credit card outstanding that you already have. Typically, a lender will not give a loan if the total EMI obligation (including the current personal loan that you are trying to apply for) exceeds 50-75% of your total net take-home salary.
  • Your gross/net salary
  • Your credit score is reflected in your credit reports like CIBIL or Equifax. Having a good credit score is a necessary but not a sufficient criterion.
What is the minimum amount for a personal loan?

Yes. Though the exact amount of the minimum personal loan amount varies from one lending institution to another, most lenders have set their minimum personal loan principal amount at Rs. 30,000.

What is the maximum amount of personal loan?

The maximum amount that you can avail depends on your income level, your profession and the lender’s assessment of your loan application. Generally, the lenders sanction the loan based on their calculation, so that the EMI is not more than 40% – 50% of your monthly income. Also, the lenders consider if you have any dues while calculating the loan amount.

And, for the self-employed, the loan value is determined on the basis of the profit earned as per the most recent acknowledged Profit/Loss statement, while taking into account any additional liabilities (such as current loans for business etc.) that the applicant might have.

What is the tenure of a personal loan?

Personal loans feature tenure of 1 year to 5 years or 12 to 60 months. In rare cases, shorter or longer personal loan tenures may be allowed by the borrower on a case-by-case basis.

Can I pre-close my personal loan?

Some banks have a lock-in of 6 months to a year while some banks allow you to pre-close even after the 1st EMI has been debited from your bank. There may also be restrictions that you can only use your own funds (and not the balance transfer cheque of another bank) to pre-close a loan. In addition, banks may allow pre-closure at no cost or may levy a pre-closure fee (2-5% of the amount being pre-closed). Please ask for clarifications from your lender’s loan advisor on all these factors before signing the loan document.

Can I make part payments in my personal loan?

There are some banks and NBFCs allow part payment in personal loans subject to certain restrictions on the number of payments and the maximum amount that you can pay in a year. You need to check with your lender regarding the same.

What are the documents required while applying for a personal loan?

You need to provide your KYC documents like identity, residence, PAN proof etc, last 3 months’ salary slip, last 6 months’ bank statement and a passport-sized photograph. The lenders may also ask for additional documents later like Form 16, appointment letter, company ID card, previous company relieving letter etc.

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