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Personal Loan FAQs

Personal Loan FAQs- Frequently Asked Questions

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. 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. (personal loan FAQs)

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. (personal loan FAQs)

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.

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.

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. (personal loan FAQs)

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. (personal loan FAQs)

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. (personal loan FAQs)

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.

Can i apply for a personal loan jointly with my spouse?

Yes, a personal loan can be applied either by yourself (singly) or together with a co-applicant (jointly). The co-applicant needs to be a family member like your spouse or parents. By getting a co-borrower, your loan application will be processed in a higher income bracket, enabling you to avail of a larger loan amount. However, keep in mind that if either you or your co-applicant have a poor credit history, the chances of success of your loan application may be adversely affected.

Which loan duration should i choose?

The loan duration depending upon your income and experience the duration would be decided which ranges from 12 to 60 months. When you choose the duration, you should calculate your monthly EMI (using our Personal Loan EMI Calculator) to see whether the same is affordable considering your current monthly income and other fixed monthly commitments. If you choose a short duration, your monthly EMI will be higher and vice versa. 

How the selection of duration will affect my EMI and interest cost?

When you choose a short-duration loan, say 2 years, your EMI amount will be higher. If you don’t have enough fixed obligation to income ratio (FOIR) or your current income after existing monthly fixed commitments is not enough to cover the short duration EMI, there will be a lower chance of approving your loan. In such a situation, you should go for a higher tenure (max 5 years).

The below example will make it more clear for you.

Example

A personal loan of Rs 3 lakh at an 11% interest rate,

  • If the loan duration is 2 years, the monthly EMI will be Rs 13,982 and the total interest payable will be Rs 35,576.
  • If the duration of the loan is 5 years, the monthly EMI will be Rs 6,523 and the total interest payable will be Rs 91,364

Use of Personal Loan EMI Calculator for accurate EMI calculation compare the same with your loan offers

So when the duration is shorter, the monthly EMI amount will be higher however your total interest payable will be lower. If your duration is longer, the monthly EMI will be lower but the total interest payable will be higher. So it’s advisable to go for a shorter duration if you have enough monthly income to cover the larger EMI as it will help to reduce your total interest cost and close the loan earlier.

Which banks/ financial institution should i choose for personal loan?

It is good to compare the offers of various banks before you settle on one. Some key factors to consider when deciding on a loan provider include interest rates, loan tenure, processing fees, etc.

What are pre-payment/foreclosure charges and how much are they?

In case you decide to pay off your personal loan before the loan tenure is completed, you get charged an additional fee termed as pre-payment/foreclosure charge/penalty. This pre-payment penalty usually ranges between 1% and 2% of the principal outstanding; however, some banks charge a higher amount to foreclose a personal loan.

How can i reduce my interest cost in a personal loan?

First, you need to select the lender that offers the best rate of interest. You can compare the rate of interest by various institutions before taking a decision. Once you decide on the lender, it’s advisable to go for a shorter term that will also fit into your current monthly income and current obligation to income ratio (FOIR). The EMI amount will be higher for the short duration but the overall interest payable will be lower.

The below example will make it more clear for you.

Example

A personal loan of Rs 3 lakh at an 11% interest rate,

  • If the loan duration is 2 years, the monthly EMI will be Rs 13,982 and the total interest payable will be Rs 35,576.
  • If the duration of the loan is 5 years, the monthly EMI will be Rs 6,523 and the total interest payable will be Rs 91,364

Use of Personal Loan EMI Calculator for accurate EMI calculation compare the same with your loan offers

So when the duration is shorter, the monthly EMI amount will be higher however your total interest payable will be lower. If your duration is longer, the monthly EMI will be lower but the total interest payable will be higher. So it’s advisable to go for a shorter duration if you have enough monthly income to cover the larger EMI as it will help to reduce your total interest cost and close the loan earlier.

What if I default on my scheduled Personal Loan EMIs?

In case you miss your scheduled personal loan EMIs and are unable to make future payments on your personal loan, the lender initially make attempts to recover the due amount through settlements and recovery agents. If such attempts fail and your loan account is marked as a default, this personal loan will show up on your credit report as a default, which will adversely affect your credit score and make it difficult for you to get approval for loans and credit cards in the future.

How should i choose the right lender?

There are several key points to keep in mind while choosing a lender like:

– Interest rates
– Loan processing fees
– Documentation charges
– Pre-payment charges
– Foreclosure charges
– Total repayment outgo through EMIs
– Loan tenor

Sometimes, additional charges are applicable if the payment mode is altered, so read the fine print carefully before signing the loan documents.

What is EMI? And how do I lower it?

EMI or equated monthly instalments are an important part of a loan. It is the intervallic instalment amount that you pay to clear your loan.

It is important to calculate your EMI and find a way to keep it as low as possible. There are three factors that determine your EMI:

  • The loan amount
  • The interest rate
  • The tenure

The easiest way to calculate EMI is to use our online Personal Loan EMI Calculator. You can change the loan amount and tenure as you please until you finally find the right EMI. If you have a fixed loan amount in mind, then adjust the tenure until you find the right EMI. In the early period of the loan tenure, the EMI will have a higher interest component and lower principal amount, but this will reverse as you near the end stages.

If you looking to reduce your overall interest costs, it’s advisable to go for a shorter duration repayment term.

Can we transfer the balance in personal loan to a new lender?

Some lenders allow the balance transfer facility, the process of transferring the loan outstanding from the existing lender to a new institution. Since such a balance transfer requires a foreclosure of the existing loan and most of the lenders charge on loan foreclosure, you need to ensure that there will be sufficient reason for such a balance transfer, such as a significant reduction in interest rate, an extension of duration, waiver in processing/ foreclosure charges etc.

What is the difference between Part payment, Pre-payment and Pre-closure? Are there any charges related to this?
Part Payment

A part-payment amount is less than the full loan principal amount and this payment is made before the loan amount becomes due.

Pre-Payment

This occurs when you pay off your personal loan in part before it becomes due as per the EMI schedule. The pre-payment amount may or may not be equal to the total due amount.  Pre-payment charges usually range from 2% to 5% of the outstanding loan amount. Additionally, many banks do not allow pre-payment/pre-closure of personal loans before a specified number of EMI payments have been completed.

Pre-closure

Pre-closure refers to completely paying off a personal loan before the loan tenure has ended. Just like pre-payment charges, pre-closure charges range from 2% to 5% of the loan amount.

How do banks/ other lenders decide on the maximum loan amount?

Although the loan sanctioning criteria may differ from one bank to another, some key factors determining the maximum loan amount that can be sanctioned to you include your credit score, current income level as well as liabilities. A high credit score (closer to 900) means you have serviced your previous loans and/or credit card dues properly, leading the lenders to feel that you are a safe borrower, leading to a higher loan amount being sanctioned.

Your current income level and liabilities (outstanding credit card dues, unpaid loans, current EMIs, etc.) have a direct bearing on your repayment capacity. Therefore, if you are in a lower income bracket or have a large amount of unpaid credit card bills or outstanding loan EMI, you will be sanctioned a lower personal loan amount than those with a higher income or fewer financial liabilities.

Should I always go for the lowest possible EMI when choosing a loan provider?

Low EMI offers can typically result from a long repayment term, a low-interest rate, or a combination of the two factors. Thus, sometimes, you may end up paying more interest to your lender if you choose low EMIs. So use our online personal loan EMI calculator to find out your interest payout over the loan tenure and your repayment capacity before taking a call.

Does credit scores like CIBIL play a role in loan approval?

Certainly, as the credit score measures your financial status, repayment history and financial discipline. Maintaining a healthy credit score would ultimately help your application and also the amount of loan you get and also the duration.

How is personal loan different from loan against credit card?

A loan on a credit card is an offer that you may be able to avail on your credit card. In many ways, a loan offered on a credit card is similar, especially in terms of the interest rate and the loan tenure. However, a loan on a credit card is only applicable to specific credit cards and you cannot approach any company other than your credit card issuer for a loan on the credit card. In the case of a personal loan, you can approach any lender for the loan. Moreover, credit card loans do not require any additional documentation unlike a personal loan application.

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