Personal loan is an unsecured loan provided by a bank or non-banking financial company (NBFC) to an individual on the basis of key criteria such as income level, credit history, repayment capacity, employment history and other relevant factors that tend to vary from lender to another. Also known as a signature loan, a personal loan is extended to salaried and self-employed individuals alike on the basis of a judgment call made by the loan sanctioning officer on the basis of documentation submitted by the applicant.
As a personal loan is unsecured and you do not put up collateral such as property or gold to avail it, in case of a default, the lender cannot put up anything you own up for auction. Due to the greater perceived risk when sanctioning this loan, the interest rates are higher as compared to a home, gold or car loans. However, like any other loan, defaulting on a personal loan is definitely not a good idea, as it would show up on your credit report and lead to problems when you attempt to apply for credit cards or other loans in the future.
Q1. What can I use a personal loan for?
A personal loan can be used for almost any type of expense ranging from big ticket appliance purchases and home renovations to luxury vacations and debt consolidation. Some other cases where personal loans may be useful include payment to unexpected medical bills, investment in business, fixing your car, down payment of new house and much more.
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Q2. Am I eligible for personal loan?
You must have a regular source of income to avail a personal loan whether you are a salaried individual, self-employed business person or a professional. A person’s eligibility is also affected by the company he/she is employed with, his/her credit history his/her residential location and other factors as per the lender’s criteria.
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Q3. Is there a minimum personal loan amount that I need to borrow?
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.
Q4. How is the maximum loan amount decided?
When calculating the maximum personal loan amount in case of salaried people, the bank/financial institution takes care that the EMI does not exceed 30% to40% of the applicant’s take home salary. Any existing loans that are being serviced by the applicant are also considered when calculating the personal 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.
Q5. 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.
Q6. Can I apply for a personal loan jointly with my spouse?
Yes, 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 a larger loan amount. However, keep in mind that if either you or your co-applicant have poor credit history, the chances of success of your loan application may be adversely affected.
Q7. What are the key documents required when applying for a personal loan?
Though the documentation requirements of personal loans vary from one financial institution to another, some of the key documents that you would need to provide with your personal loan application include:
- Income proof (Salary Slip for salaried/recent acknowledged ITR for self-employed)
- Address Proof Documents
- Identity Proof Documents and others
- Certified copies of degree/license (in case of self-employed professional) and others as per the lender’s criteria.
Q8. What are the key steps in the loan approval process?
Approval of loan is at the sole discretion of the loan sanctioning officer who bases his/her decision on the basis of the criteria specified by the bank/ financial institution. The entire process can take from about 48 hours to about two week’s time. Once all the necessary documents are submitted and the verification process is completed, the loan, if sanctioned, is disbursed within seven working days by the bank. In order to avoid delays in loan processing and disbursement, do keep all necessary documents ready along with the post dated checks (PDC) and/or signed Electronic Clearing System form.
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Q9. How to decide which bank/financial institution to take the loan from?
It is always a good idea to compare the offers of individual banks before you decide to settle on a specific provider. Use online tools like the loan eligibility calculator and personal loan EMI calculator to find the loan option that suits you the best. Some of the key factors to consider when deciding on a loan provider include interest rates, loan tenure, processing fees and others.
Q10. How do banks decide the maximum personal loan amount that I can get?
Though loan sanctioning criteria may differ from one bank to another, some of the key factors that determine the maximum loan amount that may be sanctioned to you include – credit score, your current income level and your current liabilities. A high credit score (closer to 900) shows that you have serviced your previous loans and/or credit card dues in a proper manner, which would lead lenders to feel that you are a safe borrower leading to the sanction of a higher loan amount. Your current income level and your liabilities (outstanding credit card dues, unpaid loans, current EMI’s 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 would be sanctioned for a lower personal loan amount compared to an individual with a higher income or fewer financial liabilities.
Q11. Should I always choose the lowest possible EMI when choosing my loan provider?
Low EMI offers can typically result from a low interest rate, a long repayment term or a combination of the two factors. Thus in some cases, you might end up paying a lot more to your lender as interest if you choose the lower EMI option. Instead use online tools like the personal loan EMI calculator to figure out your interest payout over the loan tenure and your repayment capacity before making your decision.
Q12. What are the prevailing rates for personal loans?
Being unsecured loans, personal loans feature a higher rate of interest as compared to secured loans such as home loans and car loans. At present, many leading banks and NBFCs in India are offering personal loans at interest rates as low as 10.99 %. However, the rate of interest applicable to a specific applicant would be contingent on key factors including credit score, income level, loan amount and tenure, previous relationship (savings account, loans or credit cards) with the lender as well as other factors.
Q13. How do I compare the interest rates of personal loans?
Log on to Paisabazaar.com and fill out our personal loan eligibility tool to get a list of all available personal loan option along with key data such as applicable interest rate, processing fees as well as information about other charges such as pre-payment charges. Using these data, you can easily compare the various personal loan options available with multiple banks and NBFCs.
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Q14. How do I get the lowest interest rates on personal loan?
Earlier, you might have had to go to multiple lenders in order to get the information regarding interest rates, tenures, processing fees etc. Not anymore. Just log on to Paisabazaar.com and fill out the simple form in our Personal Loan sections and in seconds you get information regarding numerous prospective lenders along with the applicable interest rates and various charges including processing fees. You can easily choose the lowest interest rate from the available list and apply for a personal loan within minutes from the convenience of your home or workplace.
Q15. Is there any extra charge payable when applying for personal loan?
Yes. In addition to the interest payable on the principal amount, there is an additional non-refundable charge that needs to be paid when applying for a personal loan. Processing fees, which are usually 1%-2% of the loan principal, are charged by the lender to take care of any paperwork that needs to be processed as part of the personal loan application process. This charge may be waived by your lender in case you have a long term association with the lender.
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Q16. Are personal loan interest rates fixed or floating?
In case of a fixed rate personal loan, your EMI amount remains fixed therefore every month during the loan tenure, you will pay the exact same amount as EMI. In case of a floating rate personal loan, the EMI amount will keep decreasing as it follows the reducing balance method of calculating interest payout on a personal loan. In case of a floating rate, the applicable interest rate may be varied by the bank periodically as per the new MCLR rules, floating interest rates may be changed either on a half yearly or yearly basis.
Q17. What is the difference between reducing and flat interest rate?
As the name implies, Reducing Balance Interest Rate involves the borrower to pay interest only on the outstanding loan balance, i.e. the balance that remains outstanding after getting reduced by the principal repayment. Flat Interest Rate is wherein the borrower needs to pay interest on the entire loan balance throughout the loan term. Thus, the interest payable does not decrease even as the borrower makes the periodic payments (EMIs).
Q18. What is relationship discount?
Relationship discount is an additional benefit that is provided by the banks or lenders to a prospective applicant if they have a pre-existing relationship with the lender. Such pre-existing relationship may include having a salary/savings account with the bank or having an existing credit card, fixed deposit or loan with the prospective lender. Relationship discounts may result in the lender providing you with discounts when applying for the loan like – waiver of the processing fees, lower interest rates or others.
Q19. How is the personal loan disbursed?
Once you get approved for a personal loan, you may either receive an account payee cheque/draft equal to the loan amount or get the money deposited automatically into your savings account electronically.
Q20. How long does it take for personal loan to be disbursed?
You can choose and apply for a personal loan within minutes through Paisabazaar.com. After you have filled out the online application form on our website, the prospective lender gets in touch with you and asks you to provide the relevant documents to support you loan application. Once you have submitted all the relevant documents, the bank may disburse your personal loan as early as the next 48 hours. The usually time frame to complete the loan disbursal process is 3 to 4 working days.
Q21. Which are the best banks and NBFCs for a personal loan?
Personal loans are offered by all leading banks and numerous NBFCs (non-banking financial companies). Some of the leading providers of personal loans include HDFC Bank, IndusInd Bank, Citibank, Axis Bank, Fullerton India, Capital First, State Bank of India and Associates, Indian Bank, Karnataka Bank, Standard Chartered Bank and many others.
Q22. Is there any Balance Transfer offer on a personal loan? Are there any benefits of this balance transfer?
In some cases, a lender would allow you to transfer the current balance (amount still to be repaid) on your current personal loan from current lender to a new one. In this case, the new lender would pay off the balance amount to the current lender. At the end of the balance transfer process, you will owe the new lender whatever payments plus applicable interest that is left on your current loan.
A balance transfer helps you benefit from the lower interest rate offered by the new lender, however, there are a few charges such as balance transfer fee, pre-payment charges, etc. that may be applicable to the procedure.
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Q23. Why do my initial EMIs have little impact on the principal amount due?
A major portion of your initial EMIs are actually used to pay off the interest dues on your personal loan. This process is termed as “front loading”, hence only a small portion of the principal is paid off initially. As you progress further with your EMI, these small decreases in the principal amount add up leading to a decrease in the interest charged on the outstanding amount, thus a larger portion of the EMI is used for paying off the loan principal in later years.
Q24. 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.
Q25. Are there any tax benefits associated with personal loan?
Personal loans usually have no tax benefits, however, in case you take a personal loan for home renovations/down payment, you may be eligible for income tax deduction under section 24. However, this tax benefit is limited to only the interest on the loan and not the principal amount. Also you would have to furnish proper receipts to claim deduction.
Q26. How to repay the personal loan?
The loan can be repaid in the form of Equated Monthly Installment (EMI) via post-dated cheques drawn in favour of the bank or by releasing a mandate allowing payment through the Electronic Clearing Services (ECS) system.
Q27. 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.
Q28. 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 outstanding loan amount. Additionally, may banks do not allow pre-payment/pre-closure of personal loan 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 charge, pre-closure charges range from 2% to 5% of the loan amount.
Q29. What is credit report and score?
A personal loan is an unsecured loan hence your credit history usually plays a significant role in the loan approval process. There are three credit reporting agencies that operate in India – Equifax, Experian and CIBIL TransUnion. These have tie-ups with various lenders and provide their credit rating services to help lenders evaluate prospective borrowers. Experian India currently has collaboration with Union Bank of India, Sundaram Finance, Punjab National Bank, Magna Finance, Indian Bank, Axis Bank and Federal Bank to provide credit information services. Similarly, Equifax India currently has tie-ups with leading lenders such as State Bank of India, Union Bank of India, Religare Finvest Limited, Kotak Mahindra Prime Limited and Bank of Baroda to provide their credit information services. Apart from banks and NBFCs, individuals can also check their credit score and get a copy of their free credit report online through Paisabazaar.com. Credit Bureau (India) Limited (CIBIL) is third player in the credit reporting marketplace. It is India’s first credit information company that in collaboration with TransUnion, a globally recognised credit reporting agency.
The credit reporting agencies – Equifax, Experian and CIBIL TransUnion maintain detailed records of your credit history including repayment track record of all your credit card bills and any current or previous loans. Before approving your loan, the prospective lender cross checks your repayment track record.
Q30. How is having higher credit score beneficial?
A higher credit score indicates that you have a good track record with respect to loans that you have borrowed in the past. Therefore if you credit score is high (more than 750 in case of CIBIL TransUnion), your chances of being granted a loan are much higher than if you have a lower score. Additionally, you may be able to negotiate benefits such as a lower interest rate, higher loan amount, waiver of processing charges, etc. by leveraging your high credit score.
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Q31. What do the terms settlement, default and closed mean? Does it affect my credit score?
If you get a copy of your credit report, you might come across the terms – settlement, default or closed with respect to your old or current loans and credit cards. The term “settlement” means that you and the lender have come to an agreement according to which, you have paid a portion of your dues and the lender would no longer pursue you for the balance amount. Up to 40% of your total dues may be waived off by the lender as part of the settlement process however it should be used as a last resort when you are having problems with paying off your dues. If any of your borrowings is marked as a “default”, it means that you have not paid your dues with respect to that loan or credit card. Additionally, you and the lender were unable to come to an agreement regarding the outstanding dues. A “closed” tag is only provided to your prior loans or credit cards and it indicates that these loans/credit cards have been paid off in full.
If the terms settled and/or default show up on your credit report, it reflects poorly on your credit history and adversely impact your credit score. Due to your low credit score you would be considered as a risky borrower by prospective lenders. The tem “closed” means that you have successfully completed all due payments on a loan or credit card, this is one of the key factors that lead to a robust credit score and you will be considered as a stable borrower by prospective lenders.
Q32. How is personal loan different from loan against credit card?
Loan on 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 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 credit card. In 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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