These loans are extended to professionals such as doctors, chartered accountants, architects and others, for setting up and growing their business or practice. These are specifically meant for individuals with professional qualifications, and the loans are given based on their capabilities, expertise, track record, revenues, and reputation.
Features of professional loans
The professional loans, without pledging collateral, usually range from Rs 50,000 to Rs 50 lakhs. With collateral, the amount can even go up to Rs 2 crore. The repayment period can vary from a year to five, depending on the amount, interest rate, and the borrower’s repayment capacity. The lending institution can also be negotiated with for alternative repayment options, with a good borrower-lender relationship being a key contributor.
Professionals currently engaged in their practice can avail professional loans. In effect, all professions where a committed practice and steady stream of income is assured are covered. While experience criteria can vary among lenders, in general at least four years of post-qualification work experience is required for doctors and CAs, while it is usually five years’ work experience for other professions.
Lenders also look at the income generating capacity of the business or practice. The business or practice should have been making profits for at least two years, and the minimum annual turnover should be Rs 1 lakh. The revenues are important because the lending institution has to ensure that the loans given will be repaid.
The minimum age for availing a professional loan is 25 years, while the upper age limit is 65 years at the time of loan maturity. In some exceptional cases, these age limits can be relaxed.
The interest rate generally applicable for professional loans varies from one lender to another and depends on various factors such as your credit worthiness, the prospects of the business or practice, etc. If backed by security or collateral, the interest rate can be lower. The processing charges applicable on professional loans can go up to 2.5% of the amount disbursed, subject to caps at the bottom and upper ends of the scale.
Usually, professional loans or any loan for that matter can be repaid earlier than the maturity date. However, most financial institutions charge prepayment penalties for repaying loans within a year. Some lenders do not allow prepayment until 6 to 12 instalments have been paid. There are also penalties on late payment of loan instalments.
Documents for taking a professional loan are almost the same as for a KYC when opening a bank account or any other financial transaction. The lending institution will ask for the following documents in general:
- Proof of professional degree, such as the certificate from the institution
- A copy of PAN Card
- Proof of residence (Passport, Driving License, PAN Card, Aadhaar, etc.)
- Proof of identity (Driving License, Passport, Voter ID, Aadhaar, etc.)
- Bank statement of the past six months
- Income tax returns for the most recent year
- Profit and loss account and balance sheet for the past two years, duly audited by a chartered accountant
- Trade license, tax returns, and proof of operation of the business
- Other documents associated with the registration and practice of the business, such as license documents from the local municipal authorities
Types of professional loans
The type of professional loan sought depends on many factors, such as the nature of the practice, whether the borrower is a salaried individual and the purpose. Professionals can take loans for setting up their businesses, buying or renting premises, for expanding their business, staffing requirements, acquiring working capital, attending seminars and conferences, and also to tide over short-term requirements.
Tips to get a professional loan
Ensure that you have all the requisite documents with you. Keep your credit score as high as possible. High credit score can help you negotiate rates better with the lending institution. Make sure that the bank knows exactly the purpose for which you are taking the loan.